Lesson 2: Currency Pairs
Let’s take a closer look at currency pairs. The first currency in the pair is called ‘base’ currency while the second one is ‘quote’ currency. In the USDEUR pair, for example, we can estimate that a US dollar will grow compared to EUR. In this case, buying USDEUR is a good idea. However, if we expect the dollar to lose value and the EUR to grow, then we’ll be selling the USDEUR. Remember that you can NEVER switch places of currencies in the pair. The base currency always remains the base, and the quote is the quote currency.
Currencies’ symbols are always determined by three letters, where usually the first two letters declares the name of the country that owns the currency and the third letter declares the name of the currency (with some exceptions of course). There are standard abbreviations for all the currencies which have been determined by the International Organization for Standardization (ISO). The main currencies traded in the FX market are the below:
|USD||United States||US Dollar||Buck|
|NZD||New Zealand||New Zealand Dollar||Kiwi|
The most traded currency in forex market is the US Dollar, which is included in the 85% of all reported transactions. This can be explained by the fact that the US economy is the largest economy in the world. The second most traded currency is Euro with 39%, the third is JPY presenting 19% of the transactions and the fourth GBP covering 13% of the transactions.
There are three types of currency pairs, the majors, the minors or major crosses and the exotics. Majors are the most liquid currency pairs and therefore the most frequently traded. Majors consist of a combination of USD and another liquid currency, as USD is the most important currency.
Here are the majors:
EUR/USD USD/JPY USD/CHF GBP/USD USD/CAD AUD/USD NZD/USD
Major crosses are pairs that do not contain the USD, such as EUR/JPY, EUR/CHF, AUD/JPY, but they consist by two major currencies.
Some forex traders prefer to focus on exotics, or exotic currency pairs. Those are made up of one major currency paired with the currency of an emerging economy, such as Mexico, South Africa, Thailand etc. Below is a table with examples of exotic pairs.
|USD/PLN||US Dollar/Polish Zloty|
|USD/HUF||US Dollar/Hungarian Forint|
|USD/SEK||US Dollar/Swedish Krona|
|USD/MXN||US Dollar /Mexican Peso|
|USD/ZAR||US Dollar/South African Rand|
|USD/NOK||US Dollar/Norwegian Krone|
|GBP/THB||Great Britain Pound/Thai Baht|
In the next lesson, we will learn how to read a forex quote.