Types of currency pairs

There are two types of currency pairs.

The Majors
The Cross pairs or Cross currencies

The Majors

These are currency pairs that include the US Dollar (USD) as one of the currencies in the pair. They are as follows;

GBP/USD {GBP traded against USD}

EUR/USD

AUD/USD

NZD/USD

USD/CHF

USD/JPY

USD/CAD



The Cross pairs (Cross currencies)

These are currency pairs that do not contain the US Dollar (USD) as a currency in the pair. These include;

GBP/JPY

GBP/CHF

EUR/GBP

EUR/JPY

EUR/CHF

EUR/AUD

AUD/JPY



Analysis of a currency pair

A currency pair consists of two currencies;

The Base Currency

The Quote Currency (Counter Currency)


The Base Currency

This is the first currency of a currency pair. It is usually located on the left hand side of a currency pair.
e.g.

GBP/USD

Base Currency

The value of the base currency is always 1 (one) in relation to either the increasing or decreasing values of the second Currency pair.

This implies that the value of the base currency is always greater or stronger than that of the quote currency.

The base currency is the basis of the buy or sell transaction.

This means that whatever action we take on a currency pair; we take that action on the base currency of that currency pair.

Example;

If we say, buy GBP/USD currency pair, we are actually saying, buy GBP since GBP is the base currency of that pair.

Since Forex trading involves the simultaneous buying of one currency and selling of another currency in a given currency pair, when we say; buy GBP/USD currency pair, it also means buy GBP then silently sell USD. Likewise, if we say, sell GBP/USD pair, we are automatically saying; sell GBP and silently buy USD. For us to be able to buy or sell the quote currency which is the second currency in the currency pair, we have to do the opposite of that action to the base currency.

Example

If we want to buy USD in GBP/USD currency pair, we will have to do this indirectly by selling the base currency which is GBP so as to indirectly buy our target currency which is the USD. This is because action must first be taken on the base currency of every currency. Therefore any action we want to take on the quote currency must be done indirectly, i.e. by doing the opposite to the base currency. Therefore if you wish to buy the quote currency, simply sell the base currency and vice versa.

The Quote Currency (Counter Currency)

This is the second currency of a currency pair. It is usually located at the right hand side of every currency pair. The value of the quote currency is ever changing (varies) in response to the current situation/event taking place in the forex market. When you hear that a currency pair appreciated or depreciated, it is the value of the quote currency that represents or reflects this appreciation or depreciation of that currency pair. Remember that the value of the base currency is always 1 (always constant

GBP/USD

Quote Currency

Example

If the value of GBP/USD moves from 1.2344 to 1.2345, it is said that value of GBP has appreciated against the USD. This also means that the value of the USD which is the quote currency in this pair has depreciated or decreased against the GBP.

It also means that initially, 1 GBP was worth 1.2344 USD but presently, 1 GBP is worth 1.2345 USD.

LOGIC

In a currency chart, the prices displayed on the right hand side of the chart represent the ever changing prices of the quote currency.

Note;
The base currency is always the owner of the currency chart and its value remains constant at 1 irrespective of what happens to the price of the quote currency.


ILLUSTRATION

BASE QUOTE REMARKS

Value = 1 Moved from The number of the Quote Increased, therefore the

1.2344 – 1.2354 Quote currency has lost value or weakened in value

and automatically the Base has gained Value.

ACTION : Buy the currency pair.


Value = 1 Moved from The number of the Quote decreased, therefore the

(Constant) 1.2344 -1.2324 Quote decreased, therefore the Quote currency has

gained value or strengthened in value and

automatically the Base currency has lost some of its

previous value.

ACTION : Sell the currency pair.


When the prices of the quote currency increases, it means that the quote currency losses value against the base currency and subsequently this implies that the base currency is gaining value or appreciating against the quote currency.

ANALYSIS OF A CURRENCY QUOTE

1 GBP = 1.2344 USD

Explanation

This implies that you have to bring or spend 1.2344 USD in order to receive or obtain
1 GBP.

Quote Currency
1 GBP = 1.2344/1.2347 (USD)

Bid Price Ask Price

Bid Price

The bid price of a currency quote is the price which your broker allows you to sell each unit of the base currency.

The bid price is also known as the selling price. This is the amount of money you will get in terms of the quote currency if you decide at any time to sell one or more units of the base currency. Since the bid price is derived from the quote currency, it implies that it constantly changes as the market price changes. The bid price also represents the real current market price.

Ask Price (Offer Price)

This is the price which your broker will allow you to buy each unit of the base currency.

The ask price is an artificial price created by your broker so that he can enjoy a small commission from every trade you place or execute. The ask price is derived by adding a small number to the bid price

Currencies and Currency Pairs

Currency Symbols

In Forex trading, currencies are traded in pairs. There are more than 25 currency pairs that are traded electronically in the Forex market; however most of the money are made from seven currency pairs, known as the Majors.

The Majors

These are as follows:

US Dollars (USD) Nickname {Green back}

Great British Pounds (GBP) Nickname {Cable}

The Euro (EUR)

Australian Dollars (AUD) Nickname {Aussie}

New Zealand Dollars (NZD) Nickname {Kiwi}

Canadian Dollars (CAD) Nickname {Loonie}

Japanese Yen (JPY)

Swiss Franc (CHF) Nickname {Swissy}

Currency Pairs

As we already know, Forex trading involves the simultaneous buying and selling (exchange) of one currency for another. This implies that for every transaction that takes place in the Forex market, there must always be 2 currency pairs involved. Thus, it will be safe to say that currencies are traded in pairs, one for the other.
In Forex trading, when you buy one currency in a currency pair, you are automatically selling the other. Likewise, when you sell one currency in a currency pair, you are automatically buying the other currency in that same pair