Currency trading in pairs

One of the most important parts of forex market trading to understand is the concept of pairs. When you trade currencies, you are simultaneously buying and selling. When you buy one currency, you are selling another, and the combination of the two currencies makes a pair. This can be really hard for those used to trading in traditional stock markets to grasp as it seem counter to what they are used to. The best way to wrap your mind around it is that when you buy stock, you are basically selling cash. When you sell stock, you are buying cash. Thus, you are buying and selling with each transaction. Now, let's take a closer look at how currency trading in pairs works.

Forex markets refer to trading currencies by pairs. The pairs are given a name that combines the two different currencies being traded or exchanged against each other. For example, USD/GBP would be the US Dollar and the sterling, or Great Britain Pound. They are one of the major currency pairs.

Most currency pairs are given nicknames or abbreviations, which reference the pair and not necessarily the individual currencies involved. For example, when you trade a cross currency pair like the New Zealand and Japan or NZD/JPY it is often referred to as the kiwi-yen. (Side note: A cross currency pair is when you are making a trading pair that does not involve the USD, as the US dollar is part of all the major currency pairs.)

The major currency pairs all involve the US dollar as one of the sides of the deal. Thus you will see USD/EUR or USD/JPY, etc. Major cross-currency pairs do exist. Although most of the trading takes place in the dollar pairs, you can choose cross-currency pairs serve as an alternative to trading the US dollar.These pairs typically involve the EUR (eurozone), JPY (Japan), or GBP (Great Britian). Cross rates are deprived from the respective USD pairs but are quoted independently.

If the major currency pairs all involve the USD, why would crosses exist? Well, it is quite simple actually, crosses enable trader to more directly target trades for specific individual currencies to take advantage of news or events.

Cross currencies allows you to choose a currency with a poor prospect, and choose a currency that has a much better outlook. You would use a cross to buy a currency that has good prospects among major currencies against one that has worse prospects. In some cases, for example, the JPY may have a poor prospect, but the USD might not be any better, thus you would use a cross currency pair to find a better option.

The most actively traded crosses focus on the three major non-USD currencies, EUR, JPY, and GBP. These are referred to as euro crosses, yen crosses, and sterling crosses as their nicknames.

You have to understand the pairs to be able to trade in the currencies market.