Monday, January 25, 2016

Brief Explanation of Currency Pairs

As we have learned in our previous article, Foreign exchange market, or simply Forex, is a market that deals with buying one currency in exchange of another, in an effort to make a profit. 

For example, you currently have 920 euros and you want to trade it for U.S. dollars, in hopes that the dollar would rise up against the euro. Let’s say that the exchange rate of EUR/USD pair is 0.92, which means you can buy 1000 USD for 920 euros. After a while, the dollar really rises against the euro, and the exchange rate of the EUR/USD pair has gone up to 0.95. At such rate, you will be able to trade 1000 USD for 950 euros. Doing so would give you a profit of 50 euros! See how much money can you make with forex trading?

Currency Pair

The currency pair is one of the most basic terms that you should understand before going into Forex trading. Currency pair is the ratio of the value of one currency in comparison to another. 

There are more than a hundred currency pairs in the forex market. A number of them are traded in bigger volumes, while some of them in smaller volumes. Most of the volumes traded comes from major currency pairs. These major currency pairs are comprised of EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD. 

You might notice that all those major pairs involves the U.S. dollar. That’s because the dollar is a world reserve currency. While the majority of currency pairs includes USD, some of the currencies trade without the USD being involved. Those pairs are called “currency cross rate”. For example, a European company wants to trade their euros in exchange of the Japanese yen. The company doesn’t have to convert euros into dollars before converting it to yen. Instead, they can use the EUR/JPY cross rate to trade the euro directly into yen.

Base currency and Quoted Currency

The first currency that’s quoted in a currency pair is called the “base currency”. For example, in a EUR/USD pair, EUR is the base currency. The base currency is typically what you want to acquire in a trade. For example, in a EUR/USD currency pair, you’re typically using the USD you have in your account in exchange for the EUR currency. 

The second currency that’s quoted in the currency pair is called “quote currency”. The quote currency represents the amount of currency you need to trade to acquire the base currency. For example, the EUR/USD pair’s exchange rate is 1.0800, it means that you need at least 1.08 USD in order to buy 1 EUR. 

Forex trading terms might appear complicated at first, but with our easy-to-understand educational blogs, we’ll make it simple for you :) We’re aiming to provide an easier and safer environment for newbie and professional traders alike, that’s why we’re here, to provide unbiased reviews of the most popular and top rated brokers. Visit Wibestbroker to see who the best forex brokers are!

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