Currency-Pairs

What are currency pairs?

In the foreign exchange market, currency is traded in pairs. Pairs have meaning in relation to each other so must always stay together.
The two currencies in a pair are traded one against the other. The rate at which they are traded is called the exchange rate. The exchange rate is affected by currency supply and demand.

The most common currencies

The most common currencies traded are called "majors" Most currencies are traded against the U.S. dollar (USD). USD is trading more than any other currency. The five next most traded currencies are the euro (EUR), Japanese yen (JPY) Pound Sterling (GBP) Swiss Franc (CHF) and the Australian dollar (AUD). Offices of six major currencies, 90% of the market.

The most common currency pair is EUR / USD.

Exchange rate

The exchange rate is constantly changing. The value of a currency determined by the forces of supply and demand by comparing it to another currency. In a currency pair is the first currency called the "base currency", while second currency is called the "quote currency" or "counter currency"

When you buy a currency pair, buy the base currency and sell the quote currency. The exchange rate indicates how many buyers of the quote currency needed to buy one of the base currency. The order of a few still remain the same, with a joint approach by the industry. USD / JPY, for example, is a pair (base = USD JPY quote). Order before the couple on how you use the word, does not change. So you either buy or sell, depending on the direction of trade. For example: USD/JPY - USD JPY is buying or selling yen to use to get USD. At the rate table on the brokers website you can see how each pair available for trading is ordered.

Here's an example: EUR/USD 1.2500 means that you need to buy one euro for 1.25USD. This also means that if you sell %u20AC1 you get 1.25USD. All trade involves buying one currency and selling another currency at the same time. If in the coming days the euro appreciates against the USD and the exchange rate is now 1.26 to 1 euro, which you purchased, you won a hundred dollars. Or, if you traded in the opposite direction, for every million you sold (at 1.25) you have lost a hundred USD (since you "buy" return EUR 1.26).

Buy and sell currency

Traders in the foreign exchange market buy and sell currency to try to make profit. There are two prices for currency: the buy price, called the "BID"; and the sell price, called the "ASK".

The difference between the "bid" and the "ask" is called the "spread". The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.

For example: the EUR/USD bid/ask rate is 1.2100/1.2200. The market maker gives $1.21 when buying from the trader, but takes $1.22 when selling to the trader. If traders buy and sell immediately without any change in the exchange rate, they lose money. This happens because of the spread - traders pay more to buy the currency than they receive when they sell in that one moment.

In fact, the spread is the leading source of income for the market maker. Like any other market, the merchant will buy at one price and sell at a higher price.