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Currency Pairs:

When we speak of currency trading or trading the Foreign Exchange, we are referring to the simultaneous purchase of one currency and the sale of another. The currency pair is quoted as an exchange rate which compares the value of one currency to another. Currencies are all traded in pairs; for example, Euro/US Dollar (EUR/USD), US Dollar/Swiss Franc (USD/CHF), or any other two currencies. When you download the trading platform, you will see all the available currency pairs you can trade. The best trading opportunities happen with the “majors” which are the most commonly traded and most liquid currency pairs. Nearly 85 percent of the daily transactions happen through the trading of the “Majors”, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar, and Australian Dollar. Major pairs are those crossed with the USD. Here is a list of the currencies you will be dealing with:

The US dollar is the main currency in the Forex market and is normally considered the ‘base’ currency for quotes. In the “Majors”, this includes USD/JPY, USD/CHF, and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/CHF 1.2985 means that one U.S. dollar is equal to 1.2985 Swiss Franc. When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has risen in value and the other currency has weakened. If the USD/CHF quote we previously mentioned increases to 1.3000, the dollar is stronger because it will now buy more Francs than before.

The currency pairs that will be available are as follows:

EUR/USD = Euro vs U.S. Dollar (Euro)
USD/JPY = U.S. Dollar vs Japanese Yen (Yen)
USD/CHF = U.S. Dollar vs Swiss Franc (Swissie)
GBP/USD = British Pound vs U.S. Dollar (Sterling or Cable)
AUD/USD = Australian dollar vs U.S. Dollar (Aussie)
USD/CAD = U.S. Dollar vs Canadian Dollar (Loonie)
NZD/USD = New Zealand Dollar vs U.S. Dollar (Kiwi)
AUD/JPY = Australian Dollar vs Japanese Yen
EUR/JPY = Euro vs Japanese Yen
GBP/JPY = British Pound vs Japanese Yen
GBP/CHF = British Pound vs Swiss Franc
EUR/CHF = Euro vs Swiss Franc
EUR/GBP = Euro vs British Pound

The most common pairs are those crossed with the USD followed by the JPY, EUR, and GBP. These currency pairs tend to be the most liquid.

Reading a foreign exchange quote can be quite simple if you remember two things:

1) The first currency is the “base” currency
2) The second currency is the “quote” currency

The base and quote order are determined by the International Standardization Organization or ISO.

There are three pairs that we will follow, where the USD is the quote – The British pound (GBP), the Euro (EUR), and the Australian dollar (AUD). In the example above, if the quote was 1.5000 that would mean it takes $1.5000 USD to buy 1 EUR. In the three currency pairs, where the U.S. dollar is the quote, a rising quote means a weakening dollar.

It would then take more U.S. dollars to equal one pound, Euro, or Australian dollar. Remember, if the currency rate increases, then the value of the base currency increases. A decreasing rate means the base currency is weakening. Currency pairs that do not involve the U.S. dollar are called “cross” currencies, but you read the pairs the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese Yen.

EXAMPLE:

You are traveling to Japan on vacation. You have brought $1000 U.S. for spending money. You exchange the money at the airport for Japanese Yen. The current exchange rate is 115.00. After the exchange you now have 115,000 yen for spending. ($1000 X 115.00 (FX USD/JPY Rate) = 115,000 yen). Once you are there, you realize that everyone accepts Visa so you don’t spend any of your 115,000 yen. You are preparing to leave for home and want to exchange your yen back to US dollar at the airport again. When you get to the airport you see that the exchange rate has changed. It is now 100.00 instead of 115.00. The dollar has become weaker. Is this good or bad? Well, here is the calculation: 115,000 yen / 100.00 (new rate) = $1150 U.S. dollars. We have turned your original investment of $1000 into $1150 without doing anything on purpose. You profited $150. In this example, you went on vacation and made $150 as the exchange rate changed. This is what happens every minute of every day in the currency market. You just need to know how to take advantage of it.

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