Each currency pair is made up of two parts: the base currency and the quote currency. For example, the U.S. dollar/Canadian dollar example we just discussed is paired as USD/CAD. The base currency is always to the left of the slash (/) mark; the quoted currency is always to the right of the slash. It is the direction of the base currency you consider when deciding whether to buy a currency pair or sell it. If you believe the base currency will appreciate against the quoted currency, you will buy the currency pair. If you believe the base currency will depreciate against the quoted currency, you will sell the currency pair. This is an important distinction for new traders to remember because it is easy to buy by accident when you meant to sell. Currency pairs offered on the forex market are constructed using currency from both developed and emerging markets.
Table 1.4 lists the most common currencies, their countries, and their International Standards Organization (ISO) codes used in the forex market to construct currency pairs.
TABLE 1.4 Currency Pair Basics
Major Pairs Major currency pairs are created by pairing currencies from countries with highly developed economies and financial systems. Major currency pairs are the most liquid and heavily traded currency pairs on the forex market. Currencies among the majors include the euro, U.S. dollar, British pound, Swiss franc, Japanese yen, Australian dollar, and Canadian dollar.
Cross-Pairs Some currencies are not directly quoted against each other; rather, they are synthetically traded by combining two different pairs. These pairs, known as cross-pairs, include currency pairs such as GBP/JPY, EUR/JPY, EUR/CHF, and GBP/CHF. When a trader executes a trade to buy GBP/JPY, the trade is really constructed by buying GBP/USD and selling USD/JPY. The dollar component of this trade is equaled out and the trader ends up long GBP and short JPY. Because these pairs are constructed with two different currency pairs, the spread or cost to trade a
EUR/USD. cross-pair is significantly more than a typical major currency pair, such as
Table 1.4 lists the most common currencies, their countries, and their International Standards Organization (ISO) codes used in the forex market to construct currency pairs.
TABLE 1.4 Currency Pair Basics
Major Pairs Major currency pairs are created by pairing currencies from countries with highly developed economies and financial systems. Major currency pairs are the most liquid and heavily traded currency pairs on the forex market. Currencies among the majors include the euro, U.S. dollar, British pound, Swiss franc, Japanese yen, Australian dollar, and Canadian dollar.
Cross-Pairs Some currencies are not directly quoted against each other; rather, they are synthetically traded by combining two different pairs. These pairs, known as cross-pairs, include currency pairs such as GBP/JPY, EUR/JPY, EUR/CHF, and GBP/CHF. When a trader executes a trade to buy GBP/JPY, the trade is really constructed by buying GBP/USD and selling USD/JPY. The dollar component of this trade is equaled out and the trader ends up long GBP and short JPY. Because these pairs are constructed with two different currency pairs, the spread or cost to trade a
EUR/USD. cross-pair is significantly more than a typical major currency pair, such as
