Introduction to Forex
Currency PairsWhat are Currency Pairs?
In the world of Forex, currencies are traded in pairs, one against the other. The rate at which they are traded is called the Exchange Rate which is affected by the currency supply and the currency demand.
The primary or first currency of a pair is known as the Base Currency whilst the second or secondary currency of the pair is called the Quote Currency. The currency pair displays how much of the quote currency is required to buy a single unit of the base currency.
The currency pairs are usually traded and quoted with a ‘bid’ and ‘ask’ price. The bid is the price at which you are willing to buy and ask is the price at which you are willing to sell.
Currency pairs are normally bought and sold as 100,000 units of the base currency. Ee.g., if you were purchasing EUR/USD at 0.85 you’d be paying Dollars for Euros as follows:
100,000 x .85 = $85,000 for 100,000 Euros
When you find a quote going up, it means that the value of the base currency is rising or in other words, it is getting stronger. If a quote is going down, it means that the base currency is weakening.
What Currencies are Traded?
In theory, any currency listed on the Foreign Exchange market can be traded, however in reality there are only a handful of currencies that are actively traded. The most widespread traded currencies (called the majors) are:
When it comes to trading currencies, only the most politically/economically liquid and stable currencies are demanded in adequate amounts. For example, because of the strength and size of the US economy, the USD is the most actively traded currency in the world.
What Currency Pairs are Traded?
From all the currencies listed in the Forex market there are 18 currency pairs that are conventionally in the Foreign Exchange Market due to their overall liquidity. These are:
Approximately 90% of all Forex trade is done in nine key Forex pairs. These are:
EUR/USD Currency Pair: The Euro and US Dollar.
USD/JPY Currency Pair: The US Dollar and Japanese Yen.
GBP/USD Currency Pair: The British Pound and US Dollar.
USD/CHF Currency Pair: The US Dollar and Swiss Franc.
USD/CAD Currency Pair: The US Dollar and Canadian Dollar.
AUD/USD Currency Pair: The Australian Dollar and US Dollar.
EUR/GBP Currency Pair: The Euro and British Pound.
EUR/CHF Currency Pair: The Euro and Swiss Franc.
EUR/JPY Currency Pair: The Euro and Japanese Yen.
From these currency pairs there are four currency pairs that account for 70% of the daily trade in Forex.
Euro/US Dollar - EUR/USD.
Great Britain Pound/ US Dollar - GBP/USD.
US Dollar/ Swiss Franc - USD/CHF.
US Dollar/ Japanese Yen - USD/JPY.
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