Understanding currency pairs in Forex trading

Date Friday, August 29th, 2008

Forex trading is done in pairs of currencies. One currency is called the base and the second constitutes the quote or counter currency.

For example, EUR/USD is one pair of currency. Under this pair, EURO is the base currency and USD or US dollar is the counter currency. Here, it has to be seen how many units of the counter currency are needed in order to buy a unit of the base currency. The quotation EUR/USD 1.2500 will mean that 1.25 of US dollar will be needed to buy one unit of Euro.

The above rate may go up or down as USD strengthens or weakens. Trading always takes place in combination of two currencies or currency pairs.

There is always a long (bought) and short (sold) side to any forex transaction. One buys Euro (long) in exchange for yen (short) or sell sterling pound (short) in exchange for Euro (long). Profits or losses are reflected in the second currency.

The seven main currencies are USD, JPY, EUR, GBP, CAD, AUD, CHF (Swiss Franc). The most important currency pairs called the majors are EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/AUD and USD/CAD.

A major is the most liquid and widely traded currency pair in the world. All major forex trades account for more than 90% of the total daily transactions.

While undertaking Fx trading, one should also understand symbols and trading terminology. The symbol for pound / USD pair is GBPUSD and the associated trading terminology is called cable. Other terminology terms are Euro, dollar yen, Swissy, dollar Canada, Aussie etc. These are used just for the convenience of traders.

There is not much to remember in symbols, pairs or terminology. Reading them once or twice is enough. There is very little to remember and one can become familiar with all this stuff within no time.

Every position involves the selling of one currency and the buying of another, e.g. USD vs. Yen or USD vs. Swiss. Traditionally, the stronger currency is the base.

If Swiss franc is going to appreciate against dollar, then sell dollar and buy Swiss Franc and the like. While deciding which way a currency is going to move, listen to economic data and other financial information.

Potential for profits exists as long as there is movement in the exchange rate. This is because one side of the pair is always gaining. All that is necessary is that an investor has to be on the right side.

by Altaf Sahibzada

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