What is forex trading and how does it work?
What is a long and short position in forex trading?
What are currency pairs in forex?
What is a currency pair?
Of course, there are many forex trading platforms to choose from. And, with Vault Markets you also get our forex trading app to make trading simple and easy. To make better trading choices, you need to know how currency on the forex market works.
When you trade in the forex market, even through the best brokers in South Africa, you buy or sell in currency pairs. A currency pair is nothing more than the exchange rate between two currencies.
An exchange rate is the price of a country’s currency in terms of another currency. Said differently, it represents how many units of a foreign currency a consumer can buy with one unit of their home currency.
Example:
EUR/USD → 1.16
Looking at the trading pair above, it would cost you $1.16 to buy €1. Thus the exchange rate would be 1.16.
When you use the Vault Markets forex trading app, how do you know which currency you are buying and which you are selling?
This is where the base and quote currency comes in.
What is a base and quote currency?
Forex for beginners may seem a bit complex, but Vault Markets is here to simplify these confusing terms. The base currency represents how much of the quote currency is needed for you to get one unit of the base currency. Looking at our previous currency pair example, it costs you $1.16 to buy €1.
The first currency that appears in a currency pair is known as the base currency. The base currency compares the values between the first and the second currency in a currency pair.
The second part of the currency pair is known as the quote currency.
Looking at the EUR/USD currency pair above, the euro would be the base currency and the U.S. dollar would be the quote currency.
The purpose of the base and quote currency is to tell you how much it costs (in quote currency) to buy 1 base currency.
What are the different types of currency pairs?
There are three categories of currency pairs used in forex trading apps:
- Majors
- Cross
- Exotics
Major currency pairs
There are 8 major currencies. These currencies are:
- USD (United States Dollar)
- EUR (Euro)
- JPY (Japanese Yen)
- GBP (Great British Pound)
- CHF (Swiss Franc)
- AUD (Australian Dollar)
- CAD (Canadian Dollar)
- NZD (New Zealand Dollar)
To be classified as a major currency pair, it needs to contain the U.S. dollar (USD) on one side and another major currency on the other. Be sure to check these details when using your forex trading app. So, if you ever see any of the above mentioned currencies paired with the U.S. dollar then you know it is a major currency pair as seen below.
Cross currency pairs
Even through the best brokers in South Africa, cross currency pairs are made up of one major currency paired with another major currency that is not the U.S. dollar. When non-USD major currencies are paired with each other, then they are known as cross currency pairs.
The most traded cross currency pairs are derived from the top 3 non-USD currencies. EUR (Euro), JPY (Japanese Yen), and GBP (Great British Pound). These are known as Euro crosses, Yen crosses and Pound crosses. The rest of the cross currency pairs are known as “other crosses”.
Basically: When using your forex trading app and see a currency pair and it includes 2 major currencies but neither of them are the U.S dollar (USD), you are looking at a cross currency pair.
Exotic currency pairs
Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as South Africa, Chile, Mexico, or Singapore.
These currency pairs are not as heavily traded as the “majors” or “crosses”, so the transaction costs associated with trading these pairs are usually higher. This applies when you use Vault Markets’ forex trading app as well.
Due to the overall lower degree of activity within the market (low liquidity), exotic currency pairs tend to be far more sensitive to economic and geopolitical events.
It is important to keep this in mind when trading exotic currency pairs.
Now that you’re all clued up about currency pairs, download the Vault Markets Forex Trading App, for Android or iOS devices and sign up to start trading.
