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Understanding major pairs in forex: things you need to know (with examples)

 

Major pairs in forex are the most frequently traded currency pairs within the foreign exchange market.

Here, we’ll explain exactly what the major pairs are (and what currency pairs are in general).

We’re also going to go through how to trade currency pairs, and to show you how it’s possible to practise trading forex pairs without risking any real money.

So, let’s get going…

 

What are the main forex major pairs?

When you trade the forex markets, all of your trades are done in ‘pairs’ of currencies.

You’ll always see them displayed in this format (currency pairs listed below are used as examples for illustrative purposes only):

  • GBP/USD
  • EUR/JPY
  • USD/CHF

Whenever you see this format in trading, you’re looking at a currency ‘pair’.

You’ll see currencies appear both as the first and the second number in the pair. (In this example, the US dollar is second in the first pair, and first in the third pair.)

This order isn’t random:

  • The first currency (USD/GBP) is always known as the ‘base’ currency
  • The second currency (USD/GBP) is always known as the ‘quote’ currency

When you trade a currency ‘pair’, you are always trading the value of the ‘base’ currency against the ‘quote’ currency.

All currency trades follow this principle, no matter how you choose to trade them.

Let’s go through an example, using the above pair of USD/GBP.

Because your base currency is US dollars, your trade will be in US dollars.

You place a trade worth $10,000. At the time, the exchange rate of USD -> GBP is 1.25. (1.25 Dollars to every pound.)

So, you purchase $10,000 for the cost of £8,000. (1.25 of £10,000 is £8,000.)

Over the next two days, the exchange rate moves to 1.1.

So, you close the trade and sell your $10,000, but due to the exchange rate change, you now receive £9,090 back, £1,090 more than you paid.

This is your profit.

As with all trades, forex trades mean you have two ways to approach the trade:

To go ‘long’. This means that you are speculating the value of your base currency will rise against the quote currency. If you’re right, you profit. If you’re wrong, you lose money.

To go ‘short’. This means you are speculating the value of your base currency will fall against your quote currency. If you’re right, you profit. If you’re wrong, you lose money.

 

So how many major forex pairs are there?

The ‘major’ forex pairs are simply the currencies that traders trade most often.

The 4 main major forex pairs are generally considered to be:

  • Euro/US Dollar (EUR/USD)
  • US Dollar/Japanese Yen (USD/JPY)
  • British Pound/US Dollar (GBP/USD)
  • US Dollar/Swiss Franc (USD/CHF)

However, some traders believe that there are 7 major pairs, and prefer to also include:

  • US Dollar/Canadian Dollar (USD/CAD)
  • Australian Dollar/US Dollar (AUD/USD)
  • New Zealand Dollar/US Dollar (NZD/USD)

 

What is the most popular major forex pair?

The Euro to US Dollar (EUR/USD) is currently the most traded forex pair, and the US Dollar is by far the most frequently traded currency.

It’s estimated that about half of all forex trades involve the US dollar in some way.

Considering more than $3 trillion moves through the currency markets each day, that’s a lot of US dollars being traded.

 

Understanding major pairs in forex: things you need to know (with examples)

 

So, how do you trade the major pairs?

Typically, forex traders will use one of three main strategies to trade currency pairs:

Spot trading

  • CFDs
  • Spread betting

 

Forex Trading Method 1 - Spot trading

Spot trading is the simplest kind of forex trade, and the one we’ve already shown you.

You open a trade on a certain amount of your base currency, which then strengthens or weakens against the quote currency.

How much the base strengthens or weakens against the quote currency – and whether you went short or long - dictates your profit or loss.

 

Forex Trading Method 2 - Spread-betting*

When you spread-bet, you’re still speculating on whether your base currency will strengthen or weaken against your quote currency.

However, with spread-betting, rather that calculating the exchange rate directly as you would with a spot trade, you bet ‘per point’ of movement.

Here’s a spread-betting forex example.

You choose to spread-bet EUR/USD.

The current price is 0.9372 Euros per Dollar.

You choose to bet £5 per point.

The US Dollar weakens, and moves to 0.9400 Euros per dollar.

The increase in points here is 38 points. (The movement from 0.9372 to 0.9400.) You bet £5 per point, so your profit on this trade is £190.

If the Euro had weakened 38 points, then you would have lost £190.

How much you bet per point is your leverage. The more you bet, the more you win or lose depending on how your trade performs.

One of the primary benefits to spread-betting is that it’s no harder to go short than it is to go long.

You choose whether to buy (go long) or sell (go short) the base currency, choose how much to wager per point.

That’s essentially it. (Barring setting a stop loss or a ‘take profit’ limit.)

 

Forex Trading Method 3 – CFDS (Contracts for Difference)

Contracts for Difference, otherwise known as CFDs, are another popular form of forex trading that allow you to go short and long with relative ease.

As with spread-betting, placing a CFD trade is a matter of selecting the size of your trade, and then choosing which way you think the base currency will move.

The key difference between spread-betting and CFDs is how you value the trade.

Spread-betting uses points. CFDs, on the other hand, use ‘lots’.

‘Lots’ are simply a unit of measurement. Every asset you might trade has a ‘lot’, and each asset you can trade has a unique ‘lot’.

(In stocks, a ‘lot’ is the price of a share. For silver, it’s 100 ounces. Crude oil is 100 barrels.)

When it comes to currency, a ‘lot’ is typically 100,000 units of the currency.

So, a ‘lot’ of GBP is £100,000. A ‘lot’ of Euros is 100,000 Euros, and so on.

When you trade CFDs, the size of your position is done as a fraction of a ‘lot’.

So, if you choose to trade 1 ‘lot’ of GBP, your trade will be worth £100,000.

Obviously, that’s quite a large trade, which is why forex trades are often done as fractions of a lot, known as:

  • Mini-lots, which are 10,000 currency units, or 0.1 of a standard lot.
  • Micro-lot, which is 1000 units, or 0.01 of a standard lot.
  • Nano-lots, which are 100 units of currency, or 0.001 of a standard lot.

Although depending on the size of the trade you wish to make, you can also trade in other fractions of lots, such as 0.5 (half a lot), 0.25 (a quarter), and so on.

If you have the financial resources, you can also place trades at multiple lot sizes.

 

Understanding major pairs in forex: things you need to know (with examples)

 

Leverage in CFDs: what you need to know

Leverage in CFDs works differently to leverage in spread-betting.

In CFDs, leverage allows you to place a high-value trade without having to invest the full capital required.

For example, say you want to place a forex trade of half a lot of US Dollars as your base currency.

Remember, a ‘lot’ of currency is 100,000 units. So, your ‘half lot’ trade would be worth $50,000.

However, let’s say you don’t have $50,000 in capital to invest.

So, you decide to use 20:1 leverage.

To work out how much capital you’ll need, you divide the value of your trade ($50,000) by the first number in your leverage figure. Which is 20 in this case.

So, if you’re placing a $50,000 trade with 20:1 leverage, that means you need $2,500 in capital to open the trade. ($50,000/20.)

When you use leverage, your profits or losses are calculated based on the trade size ($50,000 in this case) and not the capital you use.

So, if you made a 10% profit on this trade, your profit would be $5,000.

WARNING. Any losses on leveraged CFD trades will also be calculated on the total trade value. This means that you can lose more than your initial stake.

Had this $50,000 trade fallen by 10%, you would have lost $5,000 despite having only staked an initial $2,500.

It’s important to keep this in mind here because the forex markets are the biggest trade markets in the world. More than $3 trillion dollars are traded every day.

This increased liquidity means that volatility in the forex markets is higher. Price changes can be bigger and faster as a result. You can lose (and gain) more money, faster than you might trading stocks or other assets.

So, if you’re going to use leverage when trading forex, be sure you understand the risks of forex trading in full.

 

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Past performance is not a reliable indicator of future results.

So, to sum up everything we’ve covered here today:

  • In forex, pairs are two currencies traded against each other. All forex trades are done in pairs.
  • A pair comprises a base currency and a quote currency. All forex trades are speculations on whether the base currency will increase or decrease in value against the quote currency.
  • ‘Major pairs’ are the most frequently traded pairs of currency. Some traders consider there to be 4 major pairs: EUR/USD, USD/JPY, GBP/USD, USD/CHF. Others also consider USD/CAN, AUS/USD, NZD/USD to be major pairs.
  • There are 3 main ways to trade currency pairs: spot trades, CFDs and spread-betting. All have their own pros and cons.

 

Would you like to start trading currencies without risking real money?

If you’d like to practise trading currency pairs before risking any real capital, sign up for a markets.com account today.

Our account includes a full demo platform, complete with enough fake currency to allow you to practise making multiple CFD and spread-bet trades on forex, at no risk to your real money.

You do not have to fund your account to try the demo, so there’s no better way to get more comfortable making forex trades before you trade for real.

All you need to do is go through our registration process by clicking the link below: 

Start Trading Now

 

* Spread-betting is only available for UK residents under FFS Ltd.

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