- You think that the Australian dollar (AUD) will increase against the US dollar (USD), so you enter a BUY trade on AUD/USD at 0.75000
- 2 days later AUD/USD has risen to 0.75800.
- If you decide to close the trade at this point, you would have made a profit as AUD/USD has increased from 0.75000 to 0.75800, an increase of 80 pips
- However, if AUD/USD had of declined in value, to say 0.74300 (from 0.75000), then you would have made a loss on that trade.
It is worth pointing out that you can also make a profit (or loss) from a falling market. That is, you can speculate that a particular currency will decline in value buy opening a sell trade. If it indeed does decline in value, you will make a profit on that trade.
What Are FX Pairs?
As mentioned above, all currencies are traded as a pair – you cannot have one without the other. FX pairs are typically divided into three main groupings, major, minor and exotic;
Major FX pairs
Are the most-traded currency pairs in the world (based on daily trade volume) and all contain the US Dollar (USD) on one side of the pair, i.e. EUR/USD, USD/JPY, GBP/USD, USD/CAD, USD/CHF, AUD/USD and NZD/USD. Major FX pairs are the most liquid and will generally have the lowest spreads attached to them. The seven major FX pairs account for c., 80% of all daily FX trading globally, with EUR/USD volume around 30% of all FX trades.
Minor FX pairs
Currency pairs that do not contain the US Dollar are known as cross-currency or minor currency pairs. The most traded minor pairs are derived from the 3 major non-USD currencies – the Euro, the GBP and the Japanese Yen. Examples of minor pairs include: EUR/GBP, EUR/AUD, AUD/JPY, GBP/AUD and GBP/CAD.
Exotic FX pairs
These FX pairs are made up of a major currency mixed with the currency of an emerging economy, or a strong-but-smaller economy like Norway or Singapore. Some exotic FX pairs include: USD/NOK, USD/HKD and EUR/TRY.