Currency Pairs In Forex Trading

December 21st, 2008 admin Leave a comment Go to comments

A currency is a unit of exchange, facilitating the transfer of goods and/or services. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value. Currencies are the dominant medium of exchange. Coins and paper money are both forms of currency.

A currency pair depicts a quotation of two different currencies on the Foreign Exchange market. The first currency in the pair is the base currency or transaction currency. The second currency in the pair is labelled quote currency, payment currency or counter currency. Such a quotation shows how many units of the counter currency are needed to buy one unit of the base currency.

For example the quotation EUR/USD 1.2700 means that one euro is exchanged for 1.27 US dollar. If the quote moves from EUR/USD 1.2700 to EUR/USD 1.2710, the euro is getting stronger and the dollar weaker. On the other hand if the EUR/USD quote moves from 1.2700 to 1.2690 the euro is getting weaker while the US dollar is getting stronger.

Majors (main currency pairs traded on Forex) are the most liquid and widely traded currency pairs in the world. Trades involving majors make up about 90% of total Forex trading.

The Majors are: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD.

GBP/USD is the only currency pair with its own name. It is known as "Cable", which has its origins from the days when a cable under the Atlantic synchronized the GBP/USD rate between the London and New York markets. But there are also lots of abbreviations for other currency pairs such as: AUD/USD "Aussie", EUR/USD "Euro", GBP/JPY "Geppy", NZD/USD "Kiwi", USD/CAD "Loonie", USD/CHF "Swissy", USD/JPY "Gopher" and USD/CAD "Beaver".

The quotation of a currency pair usually consists of two prices. The lower price (bid) is the price at which a market maker or a brokerage in general is willing to buy the first currency of a pair. The higher price (offer or ask) is the price at which a brokerage is willing to sell the first currency of a pair. The spread is the difference between the 2 prices. For example if the quotation of EUR/USD is 1.3707/1.3709, then the spread is EUR 0.0002 (or 2 pips). In general, the more popular the pair is, the smaller the differences or spreads. Different brokerage firms have different spreads.

Currency correlation is a statistical measure of the strength and direction of a linear relationship between two diferent currency pairs. Currency correlation is computed as a correlation coefficient. In the broader sense, currency correlation can refer to the correlation between any currency pairs and the commodities, stocks and bonds markets.

A currency sign is a graphic symbol often used as a shorthand for a currency’s name. Internationally, the ISO 4217 codes are used instead of currency signs, though currency signs may be in common use in their respective countries. Most currencies in the world have no specific symbol.

When writing currency amounts the location of the sign varies by currency. Many currencies, especially in Latin America and the English-speaking world, place it before the amount (e.g., 50.00); many others place it after the amount (e.g., 50.00 S); and, before they were forbidden, the sign for the Portuguese Escudo and the French Franc were placed in the decimal position (i.e., 50$00 or 1234). The standardized European default placement, used in absence of a national standard, is that () is placed before the amount. However, many Eurozone countries have sustained or generated alternative conventions.

The decimal separator can also take local countries’ standards. For instance, the United Kingdom often uses a middle dot as the decimal point on price stickers (eg., ‘552′), although not in print. A comma (eg. ‘5,00 ‘) is a common separator used in other countries. See decimal separator for information on international standards.

By: Robert Farrel

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