The basics of trading foreign currency pairs

Currency pairs are the building blocks of the forex market, so it's important to know some of the technicalities surrounding pairs and how to use them in trading.

In this first section, we will look at the following questions:

- What is a currency pair?
- How can you trade a currency pair?
- What happens when you trade a currency pair?

Currencies come in pairs
Everything is relative in the forex market. The euro, by itself, is neither strong nor weak. The same holds true for the U.S. dollar. By itself, it is neither strong nor weak. Only when you compare two currencies can you determine how strong or weak each currency is relative to the other.

For example, the euro could be getting stronger compared to the U.S. dollar. At the same time, however, the euro could also be getting weaker compared to the British pound.

Thus, you never simply buy the euro or sell the U.S. dollar. You trade them as a pair. If you believe the euro is gaining strength compared to the U.S. dollar, you buy euros and sell U.S. dollars at the same time. If you believe the U.S. dollar is gaining strength compared to the euro, you buy U.S. dollars and sell euros at the same time. You always buy the stronger currency and sell the weaker currency.
Currency pairs are typically divided into the following three major groups:

- Major currency pairs
- Exotic currency pairs
- Currency crosses

Major currency pairs
Most forex traders begin by trading the major currency pairs, or the 'majors'. The majors are those currency pairs that are comprised of the most important currencies in the global markets—the U.S. dollar (USD)—crossed with one of seven other globally significant currencies—the euro (EUR), the Great British pound (GBP), the Swiss franc (CHF), the Japanese yen (JPY), the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD).

Take some time to learn the majors because you will most likely be seeing them a lot:

-  EUR/USD (Euro / U.S. dollar)
-  GBP/USD (British pound / U.S. dollar)
-  USD/CHF (U.S. dollar / Swiss franc)
-  USD/JPY (U.S. dollar / Japanese yen)
-  USD/CAD (U.S. dollar / Canadian dollar)
-  AUD/USD (Australian dollar / U.S. dollar)
-  NZD/USD (New Zealand dollar / U.S. dollar)

Exotic currency pairs
Exotic currency pairs, or the 'exotics', are the currency pairs that are comprised of the U.S. dollar (USD) crossed with any currency that is not considered a major currency. Exotic currencies—like the Swedish krone (SEK), the South African rand (ZAR), or the Mexican peso (MXN)—are called exotic because they are associated with illiquid currencies that might not be available in a standard trading account.

Exotic currencies are usually lightly traded and have large bid/ask spreads, that is they are relatively more expensive to trade. But many exotics are becoming more popular and more traded.

Here's a list of exotics you may be interested in using to diversify your portfolio when you get trading:

- USD/SEK (U.S. dollar / Swedish krone)
- USD/NOK (U.S. dollar / Norwegian krone)
- USD/DKK (U.S. dollar / Danish krone)
- USD/HKD (U.S. dollar / Hong Kong dollar)
- USD/ZAR (U.S. dollar / South African rand)
- USD/THB (U.S. dollar / Thai baht)
- USD/SGD (U.S. dollar / Singapore dollar)
- USD/MXN (U.S. dollar / Mexican peso)

Currency crosses
Currency crosses, or the 'crosses', are the currency pairs that are comprised of any two currencies that does not include the U.S. dollar (USD). The euro (EUR) paired with the British pound (GBP) or the Australian dollar (AUD) paired with the Japanese yen (JPY) would be considered currency crosses.

The following is a list of some of the more popular currency crosses:
- GBP/JPY (British pound / Japanese yen)
- EUR/GBP (Euro / British pound)
- AUD/JPY (Australian dollar / Japanese yen)
- EUR/CAD (Euro / Canadian dollar)
- CAD/JPY (Canadian dollar / Japanese yen)

Trading currency pairs
Traders attempt to make a profit by trading currency pairs. By determining what is going to happen to a currency pair in the future, traders can try to act today to take advantage of coming price movements.

Currency pairs can do one of the following:

- They can go up  
- They can go down
- They can go sideways

Before you can determine if a currency pair is going to go up, down or sideways, however, you need to determine which currency in the pair is strengthening and which currency is weakening compared to the other currency. For instance, if you are looking at the EUR/USD (euro / U.S. dollar) pair, you have to decide if the euro is getting stronger than the U.S. dollar or vice-versa.

Note: The first currency listed in the currency pair is called the base currency and the second currency listed in the currency pair is called the quote currency. When you look at the price of a currency pair, it tells you how many of the quote currency it would take to buy one unit of the base currency.

If the base currency is strengthening against the quote currency, the currency pair will be moving up. If the quote currency is strengthening against the base currency, the currency pair will be moving down. If the base currency and the quote currency are equally strong, the currency pair will be moving sideways.

The following is a quick reference to help you remember which way a currency pair will be moving:
- Base > Quote = Up
- Base < Quote = Down
- Base = Quote = Sideways

Once you have an opinion on which way the currency pair is going to move, you can place your trade. When trading forex, you can do one of the following three things:
- You can buy the currency pair
- You can sell the currency pair
- You can do nothing

Buying a currency pair
You would make money trading the forex if you buy a currency pair when the first currency in the currency pair (the base currency) is strengthening compared to the second currency in the currency pair (the quote currency).

Entering the trade — Buying a currency pair is as simple as clicking the “Buy” button in your trading platform.
 
While all you have to do is click a button, knowing what happens when you click that button is extremely important. But you will learn what happens behind the scenes when we cover trading on margin.

Exiting the trade — Buying a currency pair is only the first step in the trading process. To complete your trade and take your profits, or losses, you have to exit your trade. To exit a trade, you simply have to do the opposite of whatever you did to enter the trade. If you bought a currency pair to enter the trade, you must sell that same currency pair to exit the trade.
For example, if you buy the EUR/USD to enter the trade, you must sell the EUR/USD to exit that trade.

Selling a currency pair
You would make money trading the forex if you sell a currency pair when the second currency in the currency pair (the quote currency) is strengthening compared to the first currency in the currency pair (the base currency).

Entering the trade — Selling a currency pair is as simple as clicking the “Sell” button in your trading station.
 
While all you have to do is click a button, knowing what happens when you click sell is extremely important. Again, you will learn what happens behind the scenes when we cover trading on margin.

Exiting the trade — Selling a currency pair is only the first step in the trading process. To complete your trade and take your profits, or losses, you have to exit your trade. To exit a trade, you simply have to do the opposite of whatever you did to enter the trade. If you sold a currency pair to enter the trade, you must buy back that same currency pair to exit the trade.
For example, if you sell the EUR/USD to enter the trade, you must buy the EUR/USD back to exit that trade. 

Doing nothing with a currency pair
You cannot make money in the spot, or normal, forex market buying or selling a currency pair when the first currency in the currency pair (the base currency) is not strengthening or weakening compared to the second currency in the currency pair (the quote currency).

To make money when a currency pair is moving sideways, you need to use forex options. You’ll learn more about forex options later on in your forex education. For now, we will focus on learning how to identify when a currency pair is going up or down and how you can try to take advantage of those movements.