Currency pairs form the heart of the foreign exchange (Forex) market, one of the world's largest and most liquid financial markets. If you're new to trading currencies or simply seeking a greater understanding of global economic dynamics, currency pairs are an essential concept to understand. In this post, we'll learn about currency pairs and how they are traded.
What Are Currency Pairs?
In Forex trading, currencies are quoted in pairs. Each pair consists of two currencies - the base and quote currency - in which one acts as the first and the other as the second.
For example, if EUR/USD is 1.09, it implies one Euro equals 1.09 US Dollars. The currency pair value is always shown in the quote currency. In the example mentioned above, EUR/USD, the Euro acts as the base, while the US dollar acts as the quote.
Open Your free Demat Account in just 5 minutes!
Types Of Currency Pairs
The currency pairs are of three broad categories, including major pairs, minor pairs, and exotic pairs.
1. Major Pairs
Major pairs are the world's most actively traded currency pairs and involve some of the world's most stable and influential economies. The USD stands out amongst majors as it serves as a base or quote in many of them, such as EUR/USD, USD/JPY, GBP/USD, etc.
2. Minor Pairs
Cross-currency pairs do not utilize the US dollar as their base or quote currency. Examples of minor pairs are EUR/GBP, AUD/JPY, and GBP/JPY.
3. Exotic Pairs
Exotic pairs refer to any currency combination between two countries with differing economic development levels; typically, it involves GBP, USD, and EUR from developed nations paired with one from an emerging nation (INR, TRY, or SEK from developing nations).
How Are Currency Pairs Traded In India?
Futures and options of currencies are traded on stock exchanges in India, though futures tend to be more popular than options. The minimum lot size for trading currency pairs is 1000 of their base currency - unlike stocks and commodities trading, where profit or loss figures are displayed in rupee terms.
Profit and loss for currency trades are shown in their quoted currency, then converted to INR at the end of every trading day using the Reserve Bank of India's reference rate. Assume you buy 1 lot of EUR/USD currency pair at 1.0010 and sell it at 1.0015. Your profit in USD would be (1.0015-1.0010)*1000*1 lot = $0.5, which would then be converted into INR using their reference rate (0.5*82.737 = Rs 41 approx).
Conclusion
Currency pairs trading may not be the most widely practised in India, yet it is quickly gaining ground. By conducting extensive research and choosing an effective trading strategy, currency trading offers the potential to make considerable profits.
Related Articles: Is Supply and Demand Trading Suitable for Day Traders in Volatile Markets | Mastering the Super Trend Indicator: A Traders Guide | 10 Stock Trading Terms You Should Know
Popular Stocks: HDFC Bank share price | ICICI Bank Share Price | UPL Share Price | Tata Consumer Share Price | Divislab Share Price