Currency quotes explained in Forex
In every trading market, there is a certain type of asset that traders buy and sell and get payouts as a result. In stock trading, traders use company shares, in commodities, there are gold, silver, and other material assets. And in Forex, there are currency pairs.
One of the main characteristics of Forex is high liquidity. Liquidity is the ability to sell and buy something as quickly as possible. Some things are more liquid - can be easily bought or sold, while others are less liquid - it’s more difficult to sell/buy them.
Since Forex uses currencies for trading, it is considered the most liquid market because currencies are bought and sold all the time, be it for shopping, paying for utilities, making bank transactions, etc.
Two currencies - one asset
A currency pair is a combination of two different currencies that are “quoted” against each other. There is the base currency meaning it is the first one in the pair and the quote currency - the second one. When someone says the currencies are “quoted” against each other, it means that their prices are compared. These currencies are identified by the ISO Currency Code standard which is used on the global market: a three-letter code like USD, EUR, GBP, etc.
For example, in a EUR/JPY currency pair, euro is the base currency while the Japanese yen is the quote currency. And when someone mentions the price of the currency pair, it means the amount of the second currency necessary to buy the first one. In this case, the price of a EUR/JPY pair is the amount of yen needed to buy one euro.
Buying a currency pair means selling the quote currency in order to buy the base one. And even though there are two components in a currency pair, it’s still considered as one asset in Forex. When it comes to the actual price, a currency pair has two separate prices:
- The bid (buying) price: the amount of quote (the second) currency needed for buying the base (the first) currency;
- The ask (selling) price: the amount of the FX quoted currency received for selling the base currency.
The difference between the bid-ask prices and the reasons behind it
The bid and ask prices are usually different from each other. For example, the EUR/JPY bid and ask prices can look like this: 119.21/119.23. The bid price is usually lower than the ask price.
This difference in bid and ask prices (spread) is what Forex brokers use as a payout because oftentimes, they don’t have commission fees on trading or deposits/withdrawals. In this example, a spread would be 2 pips - 119.23-119.21=0.02.
The major currency pairs
The Forex market is full of different currency pairs with various characteristics. In total, there are as many Forex pairs as the actual currencies in the world, which is somewhere around 180 right now.
When it comes to classifying the currency pairs, there are:
- The major Forex pairs
- The minor Forex pairs
- The exotic Forex pairs
There are several differences between these pairs, including different currency groups, liquidity levels, and the amount of spread. Let’s see what the major pairs look like.
The major Forex pairs are the ones that contain USD (US dollar) either first or second currency - both the base and quote currency. These are the ones that are traded the most on the market and include EUR/USD, GBP/USD, USD/JPY, etc. The EUR/USD pair is the most popular and heavily-traded asset in Forex trading.
Generally, the major Forex pairs are the most liquid assets on the market. That’s because at least one element in it - USD - is considered the world currency right now and is used for every international transaction or measurement. On top of that, they are much more stable and less volatile. This means that there are fewer spreads associated with them.
The minor currency pairs
There are minor Forex pairs, which are also called currency cross pairs. So, what are the base currency and quoted currency in minor pairs? they are the pairs that don’t include the US dollar and have other currencies instead. For example, the EUR/GBP, EUR/JPY, and others are all considered minor pairs.
Unlike the major pairs, the minor ones are less liquid, but it doesn’t mean they don’t have sufficient liquidity - they are national currencies, after all. As for the volatility, they have a bit larger price differences, as well as wider spreads.
While they are called minor pairs, some of them are still very popular among many traders like the above-mentioned EUR/GBP, EUR/CHF, GBP/JPY, and many more. In general, those minor pairs that include at least one currency that can also be found in a major pair are usually traded in high volumes.
There is actually another group called exotic currency pairs. It includes currencies of emerging countries like Singapore (SGD), Brazil (BRL), etc. These are even less liquid and more volatile pairs, producing much wider spreads than even the minor pairs.
The difference between Forex pairs and other assets
One of the main differences between Forex pairs and other assets is their popularity among traders and regular users. And here’s what it means: when a trader buys a currency pair - both base and quote currency, they always sell one currency and buy a new one - they always have one currency on their account.
On other markets like stocks, a trader has to buy the stock first and then exchange it back to the currency; the trading process involves two different assets here. Therefore, Forex trading is considerably easier than other types of trading.
Because of such popularity of its trading asset, the Forex market is active 24 hours a day for five days a week (not counting some holidays). That is the reason why Forex trading has the largest traded volume per day: almost 6.6 trillion.