Forex Trading Currency Pairs — Questions and Answers
Question 1: What is a major currency pair in forex trading?
- Any pair with USD
- A pair involving USD and one of the other most traded currencies (EUR, GBP, JPY, CHF, CAD, AUD, NZD) (Correct answer)
- A pair with high volatility
- A pair with the highest value
Correct answer: A pair involving USD and one of the other most traded currencies (EUR, GBP, JPY, CHF, CAD, AUD, NZD)
Major pairs always include USD paired with another highly liquid currency. EUR/USD is the most traded major pair globally.
Question 2: What does the 'bid' price represent in a forex quote?
- The price you can buy the base currency
- The price at which the market will buy the base currency (the price you can sell at) (Correct answer)
- The average market price
- The highest price of the day
Correct answer: The price at which the market will buy the base currency (the price you can sell at)
The bid is the price at which the market maker will buy the base currency. As a trader, you sell at the bid and buy at the ask.
Question 3: What is a pip in forex trading?
- A seed from a fruit
- The smallest standard price increment in a currency pair, typically the fourth decimal place (Correct answer)
- A trading strategy
- A type of order
Correct answer: The smallest standard price increment in a currency pair, typically the fourth decimal place
A pip (percentage in point) is typically the fourth decimal place in most currency pairs (0.0001), except JPY pairs where it is the second decimal place (0.01).
Question 4: What is the spread in forex?
- The range of the day's prices
- The difference between the bid and ask price, representing the cost of the trade (Correct answer)
- The difference between currencies
- A trading pattern
Correct answer: The difference between the bid and ask price, representing the cost of the trade
The spread is the difference between bid and ask prices. It is essentially the broker's commission and represents the immediate cost of entering a trade.
Question 5: What does leverage of 100:1 mean in forex?
- You can only trade $100
- You can control $100 worth of currency for every $1 of your own capital (Correct answer)
- Your profit is multiplied by 100
- You need $100 minimum deposit
Correct answer: You can control $100 worth of currency for every $1 of your own capital
100:1 leverage means controlling $100,000 worth of currency with just $1,000 of your own money. While this amplifies profits, it equally amplifies losses.
Question 6: What is a cross currency pair?
- A pair that crosses the USD
- A currency pair that does not include USD, such as EUR/GBP or AUD/JPY (Correct answer)
- An illegal currency pair
- A pair with negative correlation
Correct answer: A currency pair that does not include USD, such as EUR/GBP or AUD/JPY
Cross pairs (or crosses) are currency pairs that do not include the US dollar, like EUR/GBP, EUR/JPY, or GBP/AUD.
Forex Trading Currency Pairs
What is a major currency pair in forex trading?