Understanding forex currency pairs is essential in foreign exchange investment, directly impacting investors' profits and losses.
For foreign exchange investors, understanding foreign exchange currency pairs is the first step in building a solid investment foundation. The volatility of the foreign exchange market makes accurate calculation of exchange rate movements crucial, as it directly affects your profits or losses. In this article, we will delve into the classification of foreign exchange currency pairs to help you better understand the foreign exchange market.
Basic concepts of foreign exchange currency pairs
Foreign exchange currency pairs are one of the most fundamental elements in the foreign exchange market, appearing in a one-on-one manner. In a currency pair, the preceding currency is called the base currency, while the following currency is the pricing currency. For example, the euro/US dollar, the pound/US dollar, the Australian dollar/US dollar, etc. are common currency pairs. Understanding the roles of these two currencies is crucial, as they provide a foundation for subsequent analysis and calculations.
Classification of foreign exchange currency pairs
Foreign exchange currency pairs can be roughly divided into two categories: direct currency pairs and cross-currency pairs. A direct currency pair refers to a currency pair in which at least one currency is the US dollar, while a cross-currency pair refers to a currency pair in which the US dollar is not involved.
In direct currency pairs, we can further subdivide them into forward and reverse-quoted currency pairs. A currency pair with a forward quotation means that the US dollar is placed after the currency pair, such as euros/dollars, pounds/dollars, Australian dollars/dollars, etc. A currency pair with a reverse quote indicates that the US dollar is in front of the currency pair, such as the US dollar/Swiss franc, the US dollar/Canadian dollar, the US dollar/Japanese yen, etc.
The main transactions in the foreign exchange market often involve direct currency pairs, as they are more popular and common. However, cross-currency pairs are also popular among investors, some of which include the euro/yen, the euro/pound, the euro/Swiss franc, etc. These currency pairs also have considerable liquidity.
Understanding the classification of foreign exchange currency pairs is one of the important foundations of foreign exchange investment, which can help you better understand market dynamics and calculate profits or losses more accurately.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.