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There are many official foreign currency trading pairs that are used all over the world, but there only a handful of currencies that are traded actively in the Forex market.
In Forexcurrency trading, only the most economically and politically stable and liquid foreign currency trading pairs are demanded in sufficient quantities.
Due to the size of the United States economy, the American dollar is the world’s most actively traded currency.
Foreign Currency Trading Pairs
In general, the eight most traded foreign currency trading pairs are the U.S. dollar (USD), the Canadian dollar (CAD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the New Zealand dollar (NZD), the Australian dollar (AUD) and the Japanese yen (JPY).
Currencies must be traded in pairs. Mathematically, there are 27 different currency pairs that can be derived from those eight currencies alone.
However, there are about 18 foreign currency trading pairs that are conventionally quoted by Forex market makers as a result of their overall liquidity.
The total amount of Foreign currency trading involving these 18 pairs represents the majority of the trading volume in the FX market. This manageable number of choices makes trading a lot less complicated compared to dealing with equities, which has thousands of possible choices to choose from.
The main trading center is London but New York, Tokyo, Hong Kong and Singapore are all important centres as well. Banks throughout the world participate.
Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
Major news is released publicly, often on scheduled dates; so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers order flow.
Foreign currency trading pairs are traded against one another. Each pair of currencies constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three letter code of the currency into which the price of one unit of XXX is expressed (called base currency).
For instance, EUR/USD is the price of the euro expressed in US dollars as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.