Forex Trivia – Forex Currency Pairs

What is Traded in Forex?

US Dollar by dungvinacosh from flickr.com

Money is what traders trade in forex. Money is currency. One buys and another sells at the same time in forex; thus, currencies are traded in pairs. All trades in forex require the simultaneous buying one currency and selling another currency—but the pair is considered as one single unit that is used to perform forex trading.

Major Currencies in Forex (listed according to established priority ranking):

EUR – fiber
GBP – pound / sterling
AUD – Australian dollar
NZD – New Zealand dollar
USD – United States dollar
CAD – Canadian dollar
CHF – Swiss franc
JPY – Japanese yen

Euro by jeroen bennink from flickr.com

Note: Since 1999, the European Central Bank (ECB) had stipulated that the euro has first precedence as the base currency. This means that the euro, when involved in all currency pairs, should be used as the base and listed first. The US dollar and euro pair is expressed as EUR/USD.

Define Currency Pair

The term “currency pair” is the structure of the currencies traded in forex. The structure has 2 parts: quotation (estimated value) and pricing (relative value) – the base currency and the quote currency, respectively.

A currency pair consists of 2 currencies used to make a trade on the foreign exchange market (or forex). The two currencies are put together and separated by the slash character in between. (A slash can also be absent.)

British Pound by London looks from flickr.com

Example: EUR/USD

  • EUR is the first currency – called the base currency. It is also the domestic or primary currency. Or the accounting currency, which is commonly used by banks and accounting firms to represent profits and losses.
  • USD is the second currency – called the quote currency. It is also called the secondary or counter currency. When used in a direct quote, the second currency is considered as the foreign currency; but when in an indirect quote, it is the domestic currency.

In this quotation: EUR/USD = 1.2500, the EUR is valued at 1.2500 US dollars per one unit. If the value changed to 1.2510, the euro’s relative value has increased; and if it became 1.2490, the euro has weakened against the US dollar. The price of quote currency represents the value needed to get 1 unit of the base currency.

Yen by jmvnoos in Paris from flickr.com

Explain Bid Price

When a trader buys a currency pair: he buys the base currency and sells the quote currency. A bid price must be given when buying (or longing) in the forex market.

The bid price is the price that a buyer is willing to pay – also known as “buy price”. Also a part of a “bid”, the bid size is the amount that a buyer wants to purchase for the bid price.

BUY Example:

GBP/USD = 1.8812
Bid price is 1.8812
This means you buy 1 pound with 1.8812 dollar

Explain Ask Price

When a trader sells a currency pair: he sells the base currency and obtains the quote currency. The ask price is necessary when selling (or shorting) in forex.

The ask price is the opposite of bid price—and also known as “offer price”, “sell price”, and “the ask”. This represents the price (and the size) that a seller is willing to accept in exchange to the currency traded. Remember: the ask price will always be higher than the bid price.

Swiss Franc by jeffremer from flickr.com

SELL Example:

EUR/USD = 1.2812
Ask price is 1.2812
This means you sell 1 euro for 1.2812 dollars

Major Currency Pairs

Major currency pairs are the most heavily traded in forex market, about 85 percent.

EUR/USD – Euro / US Dollar
USD/JPY – US Dollar / Japanese Yen
GBP/USD – British Pound / US Dollar
USD/CHF – US Dollar / Swiss Franc

Major Commodity Pairs

Commodity pairs are currency pairs from countries that have huge amount of commodities. Many countries possess abundant natural resource and commodity reserves but they are thinly traded and closely-regulated by respective governments — like Venezuela, Saudi Arabia, and Russia. These 3 major commodity pairs are considered very liquid in forex because they are traded at very high volumes.

Canadian Dollar by bricksandco from flickr.com

USD/CAD – US Dollar / Canadian Dollar
AUD/USD – Australian Dollar / US Dollar
NZD/USD – New Zealand Dollar / US Dollar

Cross Currency Pairs

Cross currency pairs are those pairs that do not include the US dollars. Before, all forex transactions are required to involve the US dollar. This means non-USD currencies had to be converted to US dollars before trading. Cross currency pairs help traders bypass this step — also called cross rates.

Examples:

GBP/JPY – British Pound / Japanese Yen
MYR/SGD – Malaysian Ringgit / Singaporean Dollar
SGD/THB – Singaporean Dollar / Thai Baht

Australian Dollar by catz2 from flickr.com

Euro crosses are cross rates that involve the euro as the reference (base) currency.

Examples:

EUR/JPY – Euro / Japanese Yes
EUR/CHF – Euro / Swiss Franc
EUR/GBP – Euro / British Pound

Advantages of Cross Currency Pairs:

  1. Lower price fluctuations compared to pairs involving the US dollar
  2. Offers high potential in terms of trading profit

Disadvantages of Cross Currency Pairs:

  1. Highly insecured trading markets
  2. High-risked due to sudden changes in political and financial states of developing and underdeveloped countries

New Zealand Dollar by sallyNZ from flickr.com

Exotic Currency Pairs

Exotic currency refers to currencies that are not popular in forex trading. Exotic pairs are much more volatile than the major pairs due to thinner volumes. The erratic behavior of exotic pairs may be caused by the traders who tend to jump in and out of trades as fast as they could. The high yields and pip movements attract traders but positions are quickly pulled out at the first sign of trouble.

Examples:

AUD/CHF – Australian Dollar / Swiss Franc
EUR/AUD – Euro / Australian Dollar
GBP/AUD – British Pound / Australian Dollar
GBP/NZD – British Pound / New Zealand Dollar
NZD/GBP – New Zealand Dollar / British Pound
USD/BRL – US Dollar / Brazilian Real
USD/DKK – US Dollar / Danish Krone
USD/HKD – US Dollar / Hong Kong Dollar
USD/NOK – US Dollar / Norwegian Krone
USD/PLN – US Dollar / Polish Zloty
USD/SEK – US Dollar / Swedish Krona
USD/SGD – US Dollar / Singaporean Dollar
USD/TRY – US Dollar / Turkish Lira
USD/ZAR – US Dollar / South African Rand

Related Terms Defined:

Cross Rate – refers to the currency exchange rate between 2 foreign currencies, but which are not the official currencies of a country where the exchange rate was quoted in. Cross rate also refers to the currency pairs that do not involve the US dollar.

Current Price – is the price mutually agreed on by both buyer and seller. This is not the bid price or the ask price; and is usually has different value.

Exchange Rate – is the price of one currency when expressed in another currency. This is the rate at which one currency can be exchanged for another currency. Exchange rate: 1 USD per 0.84 EUR – means 1 dollar is equivalent to 0.84 euros.

Foreign Exchange – (or forex trading) refers to the simultaneous buying of one currency and selling of another currency—therefore, currencies are traded in pairs and also traded through a broker. The forex market deals with the non-physical and somewhat confusing. But think of it this way: when buying the British Pound, a trader is actually buying a share in the British economy—since the currency price is directly affected by the current and future state of the British economy.

Long Position – is beneficial when market prices rise. Long pair means the base currency is bought.

Short Position – is beneficial when market prices fall. Short position means the base currency is sold.

Spot Price – (or spot rate) is the price quoted for immediate transaction or settlement.

Pip – is the smallest price change that can be made in a given exchange rate. Most major currency pairs are priced to 4 decimal places—therefore, the smallest change would happen on the last decimal point. Its equivalent would be 1/100 of 1 percent – or 1 basis point.

Quotation – refers to 2 numbers: the highest bid price and the lowest ask price available.

Currency Nicknames:

EUR – Fiber
GBP – Sterling, Cable
AUD – Aussie Dollar
NZD – Kiwi Dollar
USD – Greenbuck, Buck
CAD – Loonie
CHF – Swissy
JPY – Yen

Currency Pair Nicknames:

GBP/USD – Cable
EUR/USD – Fiber
EUR/GBP – Chunnel
USD/CAD – Loonie / The Funds
AUD/USD – Matie / Aussie
GBP/JPY – Geppie / Beast
NZD/USD – Kiwi

Sources: Investopedia, Wikipedia, and BabyPips

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