A currency pair refers to the price quote of the exchange rate for a set of two separate currencies that are traded in Forex trading markets. Visit multibankfx.com – forex trading dubai
It is basically a quotation of two currencies, where one’s value is being weighed against the other. The currency that is placed first in the currency pair is known as the base currency, while the one which comes second is known as the quote currency.
Currency pairs draw a parallel between the value of one currency to another. Essentially it is indicated as the base currency versus the second or the quote currency. It shows the amount of quote currency required to buy a single unit of the base currency. Currencies are typically represented through an ISO currency code which is the three-letter alphabetic code they are recognized as in the international market.
To be able to read and comprehend a forex quote, one should try to be well-versed with the terminology. This would begin with a currency pair that indicates the currencies involved in the trade.
In a quote, the currency pair is typically accompanied by a bid and ask price, which shows the spread as well as the total number of pips that are between the broker’s bid and ask price.
A deeper understanding of these elements would help you trade better.
- Currency pair
A forex quote generally has only two currencies, a currency pair with a base currency and a quote currency which may also be referred to as the “counter currency”. These pairs stand for the currencies you’re trading. The top base currencies include EUR (Euros), GBP (British pounds) AUD (Australian Dollars), and USD (US Dollars).
The quote currency could be any currency. It may even be another of the common base currencies represented as:
EUR/USD = 1.3600
In the above example, EUR is the base currency and USD is the quoted currency. This can be interpreted to reveal that a single Euro equals 1.36 US Dollars.
Regardless of the currency that is positioned as the base currency, be it USD, EUR etc, the base currency would always be equal to 1. The quoted figure, which is 1.3600 represents the quote currency, USD, it takes to buy just a single unit of the base currency, which in this case is EUR.
As per the forex convention, whenever these two currencies are compared, EUR is always the base. In case USD were the base currency, the quote would be:
This hypothetical quote implies that 1 USD equals .7352 EUR. Try dividing 1 by .7352 and you would reach 1.36. This makes it clear that even though the outcome appears to be different, the equation between the two currencies remains the same.
- Bid and Ask
Let’s make it clear as this could be confusing for many–a bid price does not refer to the price you’ll bid when you choose to purchase a currency pair.
These terms–the bid price and the ask price are used from the forex broker’s point of view. If you look at it from your broker’s perspective, you’re the potential buyer, the broker demands a bit more than what he may choose to bid if you were the seller. In the example we talk about below, if you choose to buy EUR which is the base currency, you’ll pay the broker’s asking price, which is 3.3605.
If you happen to be the seller, you’d take the broker’s bid, which is 3.3600.
Confused? Try to go back to the fact that bid and ask prices are from the broker’s perspective. When you buy, you pay the rate the broker ‘asks’ for and when you sell, you take from the broker what he ‘bids’ for.
The difference between the bid and the ask is known as the spread. It is basically the broker’s commission on the trade.
EUR/USD = 1.3600/05
In this case, the bid is 1.3600, and the ask is 1.3605. There’s just a fractional difference between a bid and an ask price which is below 1/100th of the currency unit. Typically, just the last two digits (05) of the four trailing digits are depicted which would be shown as:
EUR/USD = 1.3600/1.3605
For this particular one, the bid price is 1.3600, and the ask is 1.3605.
- Spreads and Pips
In the world of forex, you would come across the term pip frequently. A pip stands for either “percentage in point” or “price interest point,” which indicates the basic movement of a currency pair in the market. As a unit of measure, it’s the smallest unit of value in an FX quote.
Hence, in this example
EUR/USD = 1.3600/1.3605
The balance between the 1.3600 bid and the 1.3605 ask is 5 pips. The first number, 1.3600, indicates the bid price, whereas 1.3605 stands for the ask price.
Major Currency Pairs
Euro against the U.S. dollar, which is depicted as EUR/USD is one of the most popular currency pairs to be traded. Since it is so frequently traded, it happens to also be the most liquid currency pair in the world.
Currency pairs in total could be just as many as the number of total currencies in the world. This number keeps varying on the basis of the currencies that come and go. Currency pairs are categorized as per the daily trade volume for each pair.
The currencies whose trade volume against the U.S. dollar is high are known as the major currencies, which include:
USD- U.S. dollar
JPY- Japanese yen
GBP- British pound
CHF- Swiss franc
AUD- Australian dollar
CAD- Canadian dollar
The last two currency pairs mentioned above are also called commodity currencies since Canada and Australia are rich in commodities and thus the currencies are affected by commodities prices. Visit forex metatrader