Some Elementary Basics Concerning Foreign Currency Pairs

March 27, 2012 by Leo D. Endo  
Filed under Finance

A foreign currency pair simply refers to the quotation of the value of one currency relative to that of another. The currency used as the base or reference point is known as the base currency. The tender quoted relative to the base is known as the quote or counter tender.

For forex trading purposes, a pair is always written is a standard way based on ISO4217 established by the ISO (International Organization for Standardization). This standard stipulates that the base unit is written first, then the counter unit. The two units are written always separated by a backslash between them. For instance, the Euro and US dollar pair is written as EUR/USD.

All forex trade quotes are specified to four decimal places. A one digit movement up or down at the fourth decimal is referred to as a pip. It is the standard unit of measure in forex trading.

To emphasize, regardless of whether the transaction is quoted as EUR/USD 1.3250 or USD/EUR 0.7547, the value of each of these currencies with respect to each other remains the same. However, standardizing the terminology helps facilitates communications and helps avoid unnecessary confusion.

Forex traders buy-sell one individual tender for another. A transaction always involves the buying or selling of a pair. If a trader buys the AUD/USD for instance, the trader buys AUDs and sells USDs. Conversely, if a trader sells the AUD/USD pair, the traders sells AUDs and buys USDs.

The most traded pairs are the AUD/USD, the Euro and USD, the USD dollar and Japanese yen (USD/JPY), the USD dollar and Swiss franc (USD/CHF), the USD and Canadian dollar (USD/CAD) and the Great Britain pound and USD. These seven currencies account for over 80% of global forex trading and are therefore known as the majors.

For example, if a forex trader buys a base tender in exchange for the quote tender, that same transaction is described as the trader buying the pair. Specifically, if a trade is quoted as EUR/USD, the trader buys Euros and sells US dollars or, alternatively, simply as buying the EUR/USD pair. Conversely, a trader selling the EUR/USD pair sells EUR and buys USD.

In conclusion, the foreign currency pairs most traded globally in the forex market are the EUR/USD, USD/JPY, USD/CHF, GBP/USD, AUD/USD and USD/CAD. The value of foreign exchange trades involving these six pairs generally account for at least 80% of the total foreign exchange market. The seven currencies are for that reason known as the majors.

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