What is a Currency Pair and how to read them
A currency pair is when the values two currencies are compared against each other. In Foreign Exchange (Forex) trading, currency pairs are traded through dealers or brokers. In the currency pair, one currency is quoted against another. The first currency is known as the base currency with the second being the quote currency. For example, the Euro and the U.S. Dollar could form a pair and the rate would show how much of the second currency (the quote currency) would be required to buy one unit of the first, or base, currency.
How do we identify currencies?
Each currency has its own code, called an ISO currency code, for trading on the market. For the U.S. Dollar, the code is USD with the euro being EUR and the Great British Pound being GBP.
When people trade in Forex they are almost playing a tug of war game with the currency pairs on each end. Foreign exchange rates fluctuate constantly, depending on which currency is stronger at any given time. By buying and selling different Forex currencies, people can make a profit.
What currencies are we likely to come across?
There are major currency pairs on the market as well as minor pairs. The four most commonly traded currency pairs are:
- USD/JPY (Japanese Yen)
- USD/CHF (Swiss Franc)
You will notice that these four all have the U.S. Dollar as part of their pair. The major pairs are the most widely traded in the world and all have their nicknames. For example, the EUR/USD is called the “euro dollar”, USD/JPY is the “dollar yen”, GBP/USD is “pound dollar” and the USD/CHF is the “dollar swissy”.
Do you have to pair currencies with USD?
No, currencies don’t have to be paired with the USD. If they aren’t, they are known as a “cross-currency pair” or, put simply, “crosses”. The main crosses can also be called “minors”. Aside from the USD, the most actively used currencies in Forex are the Japanese Yen, the Euro and the British Pound.
Interesting right? Click here to learn more about forex trading!