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NO07 - Forex currency pair explained

"The forex currency pair is one of the most basic things you should understand when it comes to the forex markets. Regardless of whether you have traded stocks or other markets in the past, when it comes to the forex markets, the convention and naming terminology is quite different. Understanding what is a currency pair, and the pricing convention is important as it is the basic of things before you learn how to trade forex. In this article, we explain in detail what is a currency pair in forex and how the pricing is derived based on the currency pair concept. By the end of this article, you should have a fair understanding of currency pairs and how they are used in trading forex. We will also touch upon some concepts in this article which we will explain in detail at later stages of the forex education course. But before we go into those details, here is a basic foundation of currency pairs."

Currency pairs is a term that is generally used in the forex markets. You can think of currency pairs as being similar to that of a financial security that you will come across in any other market that you trade.

However, what makes forex markets so unique is that unlike stocks for example, you don’t speculate on one asset. If you were to buy stocks of Tesla (TSLA), you would obviously be speculating on one asset, which is Tesla.

With forex, it works differently. Let’s start with a simple example. Say that you expect the euro currency to rise in value. Does it make sense to just buy the euro? No. There is something that is relative to the euro currency that will enable you to compare the performance.

Now, let’s ask another question. You expect the value of the euro currency to rise against the U.S. dollar. What would you buy? Of course, you would buy the EUR/USD exchange rate.

This is nothing but the currency pair, which is also known as an instrument or an asset in the currency markets. As you guessed by now, the securities that you trade in forex are known as currency pairs.

The term currency pair is used, because you are essentially trading a pair of currencies. Whether you are buying or selling, you are betting that one currency will rise or fall in value to the other.


Currency pair terminology in forex explained

There is some technical jargon and terminology that is used in the currency markets. Let’s start with the very basic.

Assume that you are trading the EUR/USD. This is a currency pair.

The first currency on the left side, the “EUR” is known as the base currency. The second currency on the right, the “USD” is the quote currency.

A base currency is the currency in which you are evaluating the performance of the currency. The quote currency is the comparable currency.

Take this a stretch further, let’s say the exchange rate that you see is EUR/USD = 1.1200.

What this means is that one euro is equivalent to $1.120 (US dollars). Therefore, when you see that the rate for EUR/USD is now 1.1280, it means that the value of the euro has increased by 80 decimal points against the U.S. dollar.

The converse way to look at it is to say that the value of the U.S. dollar has fallen by 80 decimal points (the exact opposite).

An easy way to remember the convention is to simply put the currency sign to the value based on the currency that you see on the right side.

For example, if USD/JPY is 100, you can read this is as ¥100 (read as 100 yen). Now what does the 100 yen compare to? Yes, one U.S. dollar. Therefore, you can read the above quote at 1 USD = 100 YEN or USD/JPY = 100.

An important point to mention here is that the price you see in the above convention is the best last price at which the currency was traded. It could be a buy or a sell.

NO07 01 Forex quotes

Example of a general forex quote

 


Forex quotes explained

So far we learned what is a currency pair and how to read the currency pair values. In this section, we will explain forex quotes. In fact, you have already seen forex quotes in the previous examples.

A forex quote is simple what we explained above.

EUR/USD = 1.1200

That is the general perception. It only shows you the current value of the euro, relative to the USD. However, when it comes to buying and selling, you will see something different.

You will have something as follows:

Currency Bid Ask
EUR/USD 1.12 1.121


Don’t let the terms, bid and ask surprise you. This is something that we will cover in the later sections of the forex education course. For the moment, this is all you need to remember.

NO07 02 Forex Bid Ask

Example of bid and ask prices in forex

 

The Bid price is the price at which you can sell the currency. The Ask price is the price at which you can buy the currency. The terms, bid and ask are as they mean.

The bid price is the best price that buyers are bidding to buy the currency. The ask price is the best price that buyers are asking for to sell the currency. Thus, when you buy, automatically, the ask price is the price at which you will buy and the ask price is the price at which you can sell the currency for.

You might be wondering why the prices are different for bid and ask. This is something called the spread. We will cover in more detail what spreads are and the things you need to bear in mind.

Read 968 times Last modified on Sunday, 05 May 2019 10:48

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