The Most Popular Forex Major Currency Pairs
Forex is a system of foreign exchange that uses currencies from a variety of countries to trade between themselves. A typical Forex major currency pair consists of two foreign currency codes, with the value of the first currency (“base”) which is typically expressed in the US dollar, and the second (“quot”), which are usually in the British pound. There exists also an international coordinate system that specifies the set up of various Forex major currency pairs. The base currency is referred to as the US dollar, and the currency pairs are named after currencies that are used as the global currency in Forex. More specifically, the names of currency pairs are derived from the currencies that are commonly used around the globe. Let’s take a brief look at a few of these currency pairs, and the characteristics of each.
USD/JPY: This is the most popular of the major currency pairs in Forex. USD stands for the US dollar, and the Japanese yen is often referred to as JPN. The relationship between the two is quite simple: when buying Japanese yen, one can purchase goods and services in the United States at a low cost, because the prices are often marked lower on the Japanese yen. In order to take advantage of this, people often “spread” the cost of what they are purchasing. For instance, if someone buys a thousand dollars of Japanese yen at a rate of five dollars per point, and they want to sell the same amount, they would pay five dollars per point, or about ten percent of the purchase. They would then turn around and sell the other thousand points they have at a half percent discount, making a profit of about ten percent on the original investment.
EUR/USD: This is the second most common of the currency pairs used in Forex. The Euro is the common currency used in Europe, and the United States is the common currency used in the United States. The relationship between these two is very easy to see. When someone buys a Euro, they are essentially buying a product from Europe at a heavily discounted rate, which makes it very appealing to buyers. However, when someone purchases a Euro at the current value (that is, with the exchange rate at the time being profitable), they will get a loss, because the exchange rate was not advantageous to them at the time.
AUD/USD: The last of the three major currency pairs, we will discuss is the AUS. The relationship between the Australian Dollar and the US Dollar is both strong and weak. On one hand, the AUD is very strong compared to the US dollar. On the other hand, the foreign exchange market is heavy with lots of trades going on between the AUS and the US dollar, which dampen some of its effects on the AUS.
JPY/JPY: Another of our currency pairs, the JPY or Japanese yen is traded quite heavily between the US dollar and the Japanese yen. The Japanese yen is highly respected in the world of finance, because of its strong stability over the past few years. Unlike the AUD/USD, there are not too many substantial differences between the two. This means that while a few traders have made some good trades using the AUS and the JPN, there is little need for these traders to pay a premium for the same reason.
USD/JPY: This one seems a bit strange, since the Australian dollar has no significant effect on the Japanese yen. This is only one example, though. Traders often trade this one as if it were one of the stronger foreign currency pairs, but in fact the price is quite balanced between the two currencies, so trading with this strategy carries a somewhat lower risk than with the other strategies we will discuss.
USD/JPY: Like USD-AUS, this is a nickname, or rather an informal name given to the two major currency pairs. This nickname became popular during the global financial crisis, when traders began to use this method to identify the currency pairs, which had gone up in value. This method worked great, at first. But recently, with the popularity of the nickname having subsided, the real value of this method has been lost.
Spreads: This is the most important concept when trading any market, and Forex is no different. These are the differences in price between two Forex major currency pairs, and are also the factors which determine the market liquidity. There are three types of spreads: the long spread, the short spread and the reverse spread. The long spread is the most common, and its purpose is to determine the difference between the bid and ask prices, allowing Forex traders to enter and exit the market more easily.