Currency Pairs

There was once a time when every country in the world had its own currency. Each country traded against another country - and therefore bought and sold the applicable currency in order to complete the transaction.

Nowadays of course, the situation is similar, except for the fact that most European countries are member of the Eurozone, and therefore utilize a single common currency - the Euro.

Nevertheless, there are still over 80 different currencies in use worldwide, and this makes for a vast selection when it comes time to trade these currencies. Which pair should you choose? Which is the most active during your trading hours? Which has the biggest daily range? Let's find out a few of these answers.

Common Currency Pairs

Whilst it is certainly possible to trade the GBP against a bizarre currency such as the South African Real or the Brazilian Real (bizarre in the sense that it is less common) - most currency trading takes place on pairs which are referred to as the "majors".

These majors have a huge amount of liquidity pouring through them at any one time, and are therefore said to have infinite liquidity. As such, the cost of trading these pairs (as implied by the spread) will be lower than say the GBP/BRL (Pound / Brazil Real)

The major currencies consist of:

  • US Dollar
  • Japanese Yen
  • British Pound
  • Canadian Dollar
  • Euro
  • Australian Dollar

 

Whenever these currencies cross with each other (known as a major cross) - the result is a very liquid currency pair. Examples include: EUR/USD (the most popular of all), GBP/USD, EUR/GBP, etc.

How Currency Pairs Actually Work

Whenever you want to trade a currency, you cannot just buy or sell that single currency. You always have to buy or sell that currency in relation to another currency. Therefore - whilst it is not possible to simply buy the GBP, it is possible to effectively buy the pound versus the US Dollar by buying the pair: GBP/USD.

As such, if you wanted to sell the GBP, you might look at selling the pair GBP/USD. Alternatively, you could buy the pair EUR/GBP - which is again betting that the GBP will fall!

Hence, you are able to trade any combination of currency pairs and still take an overall view of a particular currency.