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Tom Akkerman February 2, 2022 Average reading time: 5 min

Currency pairs in forex trading

Currency symbols

Every national currency has a three-letter alphabetic symbol known as ‘ISO currency code’. It is widely used in international trade, banking, and also in the forex market. The first two letters usually represent the country’s name while the last letter represents the name of the currency.

Here are a few examples:

  • United States dollar is represented as USD.
  • The symbol of the Swiss franc is CHF. CH stands for ‘Confoederatio Helvetica’ which is the Latin name of Swiss. F stands for ‘franc’.
  • Japanese Yen is represented as JPY
  • Mexican Peso is MXN.

ISO stands for International Organization for Standardization. It is a nongovernmental organization made up of national standardization institutes from over 160 countries.

Currency pairs in the forex market

Every time you trade forex, you are buying one currency and selling another. For example, if you want to change EUR into USD; you sell your EUR and buy USD. In the forex market, currencies are arranged in twos by writing the ISO codes of the countries together. Sometimes, it may be separated by a stroke, space, or dot. This makes it easier to write the exchange rate as the two currencies are trading against each other.

For example, the currency pair of Euro and US dollar can be written as follows:

  • EURUSD
  • EUR/USD
  • EUR.USD

Base and quote currencies

In any given currency pair, the first currency is the base currency while the second currency is the quote or counter currency.

For example;

AUDUSD

The Australian dollar is the base currency while the United States dollar is the counter currency. When an exchange rate is stated for a currency pair, it is written in terms of the quote currency. For example:

GBPUSD = 1.31756

It means that 1.31756 of USD is required to buy 1GBP. In order words

£1 = $1.31756

In the forex market, the exchange rates are always fluctuating as long as the market is in session. Traders try to predict the market direction; that is if the exchange rate will go up or down. From the quotes above, if the exchange rate increases; it means that GBP is strengthening against the USD and vice versa.

For example:

If the quotes reduce to £1 = $1.31426; It means that the dollar has strengthened against the pound.

Euro is always a base currency anytime it appears in a pair. After the Euro, GBP is the next currency that takes the position of a base currency in any pair. The third base currency preference is taken by the Australian dollar (AUD) while USD is the fourth. 

 

Major pairs

The major currency pairs are the most traded in the forex market. They are very liquid; meaning that buyers and sellers are readily available. This keeps transaction costs or spreads minimal when compared to other pairs.

Here are the major currency pairs:

  • EURUSD
  • GBPUSD
  • USDJPY
  • USDCHF
  • AUDUSD
  • NZDUSD
  • USDCAD

Sometimes, these pairs are called some nicknames by traders, analysts, or news reporters. EURUSD is referred to as ‘Eurodollar’ or fiber; GBPUSD is sometimes called ‘the cable’. USDCHF is ‘dollar swissy’; USDCAD is called ‘loonie’ and AUDUSD is nicknamed ‘Aussie’. USDJPY is called ‘dollar yen’ while USDNZD is referred to as ‘kiwi dollar’.

Notice that all the major currency pairs have the USD as either a base or a quote currency. This is because the USD is the home currency of the world’s largest economy. Most national Central banks have their foreign exchange reserves in USD. More than 80% of all forex trades involve the USD. Collectively, the major currency pairs account for 75% of all trades in the forex market. The EURUSD is the most traded pair in the forex market.

AUD, NZD, and CAD are referred to as ‘commodity currencies. This is because they are owned by countries that export commodities in huge quantities. So, changes in the prices of commodities affect the value of the currency. Consequently, AUDUSD, NZDUSD, and USDCAD are known as ‘commodity pairs’.

Minor or cross currency pairs

These are currency pairs do not include the USD. It may include two or even one of the major currencies. Examples are as follows:

  • EURGBP
  • EURAUD
  • EURNZD
  • GBPJPY
  • NZDJPY
  • GBPCAD
  • CADCHF

The minor pairs that involve EUR are called Euro crosses while the pairs that include GBP are referred to as ‘Pound crosses’.

Exotic currency pairs

Exotic currencies are not frequently traded. They are currencies usually owned by weak economies. Exotics are not liquid and can be very volatile. Similarly, exotic currency pairs are formed by pairing one major currency with another currency from a developing nation. Examples are USDZAR, USDMXN, GBPSEK, EURTKY, etc.  

 

Bid and ask price

In the forex market, two quotes are given for any currency pair at all times; bid and ask prices. The forex trader will buy at the 'ask price' and sell at the 'bid price'. So, the ask price is always higher than the bid price. As an example, let us consider the forex quotes below:

EURUSD = 1.10500/1.10525

It means that the forex trader can open a ‘sell position’ at the rate of €1 = $1.10500 or open a ‘buy position’ at €1 = $1.10525. Remember that the quotes above are just for illustration. In real forex trading, these prices are constantly changing with time.

Spread

The spread is the difference between the ask price and the bid price; it represents the broker’s profit or trading fees. If you have exchanged money from a bank or Bureau de change, you will notice that they also quote two prices; one for buying and one for selling. As usual, the ask price is more than the buy price.

Assuming you wish to change 1,000 EUR into USD and the dealer quotes a bid price of 1.10500 and an ask price of 1.12825. You will go home with USD 1,105.00. Another client that comes to buy 1000 EUR will pay USD 1,128.25.

So, the dealer’s profit = 1128.25 – 110500 = $23.25

The same scenario plays out in the forex market except that the spreads are much lower. Most brokers mark up the spread to include their trading fees, others charge a commission for every lot traded.

Generally, forex brokers offer two types of spreads:

Fixed spreads

Just as the name suggests, this type of spread remains constant no matter the market conditions. Its advantage is that a trader can easily know how much the trading fees will be before he places a trade.

Floating spreads

This type of spread is constantly changing with the market conditions; hence it is also known as ‘variable spreads’. In times of market liquidity, the spread tightens or narrows but it widens in times of volatility.

Summary

In the forex market, national currencies are grouped in pairs and traded against each other. The exchange rate is expressed as the number of units of the quote currency needed to buy or sell 1 unit of the base currency. The major pairs have high liquidity as they are the most traded; USD is always one of the pairs. The crosses do not contain USD while exotics are rarely traded and have low liquidity. The spread is obtained by subtracting the bid price from the ask price. It may be fixed or floating and it often represents the broker’s trading fees.