07 What's a FOREX Currency Pair

So what's a FOREX currency pair and how are they made up?

The Forex market is traded in and priced in Pairs.

And the reason for this is really very simple.

To buy money you need money, but obviously you are not going to use the same currency to buy and sell.

You would not buy $10,000 USD with USD, that would be a little silly… : )

GLS Equity What's a Currency Pair

But you may need to buy $10,000 USD with your AUD (Australian Dollar).
The current AUD/USD rate is: 0.77822 so in this case to buy $10,000 USD it would cost you $12,849.84 Australian Dollars. So you would be exchanging your AUD for USD or selling your AUD and buying USD.

When you are trading in the FX market you are doing exactly the same thing, you are simultaneously selling one currency and buying another.

Understanding the Base and Quote Currencies
Each currency pair has its own 3 letter abbreviation. The United States Dollar is USD, the Euro is EUR, Australian Dollar is AUD and so on..
To understand how these pairs work let’s take a closer look at the EUR/USD pair which has a current exchange rate of 1.18771

When looking at a quote for any pair they are referenced like this (Base Currency / Quote Currency). The Base currency is always 1.

GLS Equity Base Quote Currency

So how much (of the Quote currency) is it going to cost for me to buy 1 of the Base currency?

In this case it will cost me 1.18771 (or $1.19 rounded) USD to buy 1 Euro.

Long Trade
So if you were to buy (go long) the EUR/USD you would be exchanging your USD for Euro.

You would simultaneously be buying Euro and selling USD.

And you would want the price (exchange rate) to go up to make a profit.

GLS Equity Long Trade
Short Trade
If you were to sell (go short) the EUR/USD you would be exchanging your Euro for USD.

You would simultaneously be selling Euro and buying USD.

And you would want the price (exchange rate) to go down to make a profit.

GLS Equity Short Trade

Like with most financial markets these days, you can go long (buy first then sell later) just as easy as you can go short (sell first and then buy back later). And because the FX spot market is just a ratio between two currencies there is zero bias between long and short.

You can see why people refer to opening a position and then closing the position instead of just saying that you are buying and then selling, the lingo can get confusing when dealing with short trades and especially when dealing with complex derivatives.

Opening a position (trade)
I am Opening (entering) Long on the …..
I am Opening (entering) Short on the …..
Closing a position (trade)
I am Closing (exiting) my Long on the …..
I am Closing (exiting) my Short on the …..

 

Base Currency / Quote Currency

If the rate was going up, that would mean that the Euro was increasing in value compared to the USD. So when you are looking at a chart, it is really the Base currency's value that you are thinking about.

If the chart price is going up, the base currency is strengthening relative to the quote currency.
If the chart price is going down, the base currency is weakening relative to the quote currency.

When we are looking at the EUR/USD rate example, there are 4 possible things that could influence this rate.

GLS Equity Forex Demand

So the EUR/USD rate could be moving around a lot, but it may actually have nothing to do with the EUR, it is just that demand is significantly increasing for the USD, so all rates that are paired with the USD will most likely be moving.

Or if the demand for EUR is strong, but also the demand for USD is equally strong, the rate may not change at all…

Forex Major Pairs

Like we said earlier there are about 180 different currencies around the world, but many of these have very low liquidity. Unlike the USD that is classed as the worlds reserve currency and is traded significantly more than any other currency.

You can see in the chart below over 75% of the daily trading volume comes from the top 4 currencies.

GLS Equity Forex Currencies Ranked What's a FOREX Currency Pair

The most traded currency pairs in the world are called the Majors:

  • EUR/USD – (Euro / U.S. Dollar) Generally called the “Euro”
  • USD/JPY – (U.S. Dollar / Japanese Yen) Generally called the “Yen”
  • GBP/USD – (British Pound / U.S. Dollar) Generally called the “Pound” or “Cable“ or “Stirling”
  • USD/CHF – (U.S. Dollar / Swiss Franc) Generally called the “Swissie“ or “Frank”
Forex Minor Pairs

Then you have the Minors (still all paired with the USD):

  • AUD/USD – (Australian Dollar / U.S. Dollar) Generally called the “Aussie”
  • NZD/USD – (New Zealand Dollar / U.S. Dollar) Generally called the “Kiwi“
  • USD/CAD – (U.S. Dollar / Canadian Dollar) Generally called the “Loonie”
Forex Exotics Pairs

Next we have the Exotics (least traded, but still crossed with the dollar):

  • USD/CNH – (U.S. Dollar / Chinese Yuan) Generally called the “Yuan”
  • USD/MXN – (U.S. Dollar / Mexican Peso) Generally called the “Peso”
  • USD/SGD – (U.S. Dollar / Singapore Dollar)
  • USD/PLN – (U.S. Dollar / Polish Zloty)
Forex Cross Pairs

Then we have the Crosses (pairs not involving the USD):

  • AUD/CAD – (Australian Dollar / Canadian Dollar)
  • AUD/CHF – (Australian Dollar / Swiss Frank)
  • AUD/JPY – (Australian Dollar / Japanese Yen)
  • AUD/NZD – (Australian Dollar / New Zealand Dollar)
  • CAD/CHF – (Canadian Dollar / Swiss Frank)
  • CAD/JPY – (Canadian Dollar / Japanese Yen)
  • CHF/JPY – (Swiss Frank / Japanese Yen)
  • NZD/CAD – (New Zealand Dollar / Canadian Dollar)
  • NZD/CHF – (New Zealand Dollar / Swiss Frank)
  • NZD/JPY – (New Zealand Dollar / Japanese Yen)
  • EUR/AUD – (Euro / Australian Dollar)
  • EUR/CAD – (Euro / Canadian Dollar)
  • EUR/CHF – (Euro / Swiss Franc)
  • EUR/GBP – (Euro / British Pound)
  • EUR/JPY – (Euro / Japanese Yen)
  • EUR/NZD – (Euro / New Zealand Dollar)
  • EUR/MXN – (Euro / Mexican Peso)
  • EUR/CNH – (Euro / Chinese Yuan)
  • GBP/AUD – (British Pound / Australian Dollar)
  • GBP/CAD – (British Pound / Canadian Dollar)
  • GBP/CHF – (British Pound / Swiss Franc)
  • GBP/JPY – (British Pound / Japanese Yen)
  • GBP/NZD – (British Pound / New Zealand Dollar)
Summary What's a FOREX Currency Pair:

GLS Equity Remember What's a FOREX Currency Pair

What's a FOREX Currency Pair – 3 Important things:

1. Base currency / Quote currency

2. Base currency always equals 1 Quote currency is telling you how much of the quote currency it will take to buy 1 of the base currency.

3. If the chart is moving, it is the Base (First currency) you are thinking about.

If the chart is going up, the Base (First currency) is increasing relative to the quote currency. And if the chart is going down, the Base (First currency) is decreasing relative to the quote currency.


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