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Understanding Forex Currency Pairs

Eaglesteam

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Understanding Forex Currency

Before you sign up for an account, it's important to know the basics of forex trading from currency pairs to pips and profits and beyond.

A currency pair compares the value of two currencies through a numerator/denominator relationship, with a base currency on top and a quote currency on the bottom. In the EUR/USD currency pair, the world's most popular forex trading instrument, EUR is the base currency and USD is the quote currency. A EUR/USD quote displays a ratio that roughly matches what you’ll pay if you visit Paris and need to exchange dollars for euros. USD equals $1.00 in this calculation, so a “EUR/USD 1.23000” quote means the euro is trading 23% higher than the U.S. dollar.

Each ratio is quoted in two to five decimals and also comes in a flipped over version, which creates a new currency pair that moves in the opposite direction. To follow our example, EUR/USD measures the value of the euro against the U.S. dollar while USD/EUR measures the value of the U.S. dollar against the euro. Therefore:

If EUR/USD = 1.25000/1.00 =1.25000

Then USD/EUR will = 1.00/1.25000 = .80000


Historically, traders in different countries took long and short positions with their local currency at the bottom (the quote currency), but that changed after forex’s popularity skyrocketed earlier this decade. Now, most participants around the world trade the currency pair with the highest volume. The most popular version is also likely to carry a more narrow bid/ask spread, lowering trading costs.

Forex traders make money on long EUR/USD positions when the ratio goes higher and lose money when it goes lower. Conversely, traders make money on short EUR/USD positions when the ratio drops and lose money when it rallies. While brokers may offer dozens of currency pairs, four major pairs attract enormous trading interest:

  • EUR/USD – the euro and U.S. dollar
  • USD/JPY – the U.S. dollar and Japanese yen
  • GBP/USD – the British pound sterling and U.S. dollar
  • USD/CHF – the U.S. dollar and Swiss franc
Pairs
Before you sign up for an account, it's important to know the basics of forex trading from currency pairs to pips and profits and beyond.

A currency pair compares the value of two currencies through a numerator/denominator relationship, with a base currency on top and a quote currency on the bottom. In the EUR/USD currency pair, the world's most popular forex trading instrument, EUR is the base currency and USD is the quote currency. A EUR/USD quote displays a ratio that roughly matches what you’ll pay if you visit Paris and need to exchange dollars for euros. USD equals $1.00 in this calculation, so a “EUR/USD 1.23000” quote means the euro is trading 23% higher than the U.S. dollar.

Each ratio is quoted in two to five decimals and also comes in a flipped over version, which creates a new currency pair that moves in the opposite direction. To follow our example, EUR/USD measures the value of the euro against the U.S. dollar while USD/EUR measures the value of the U.S. dollar against the euro. Therefore:

If EUR/USD = 1.25000/1.00 =1.25000

Then USD/EUR will = 1.00/1.25000 = .80000


Historically, traders in different countries took long and short positions with their local currency at the bottom (the quote currency), but that changed after forex’s popularity skyrocketed earlier this decade. Now, most participants around the world trade the currency pair with the highest volume. The most popular version is also likely to carry a more narrow bid/ask spread, lowering trading costs.

Forex traders make money on long EUR/USD positions when the ratio goes higher and lose money when it goes lower. Conversely, traders make money on short EUR/USD positions when the ratio drops and lose money when it rallies. While brokers may offer dozens of currency pairs, four major pairs attract enormous trading interest:

  • EUR/USD – the euro and U.S. dollar
  • USD/JPY – the U.S. dollar and Japanese yen
  • GBP/USD – the British pound sterling and U.S. dollar
  • USD/CHF – the U.S. dollar and Swiss franc
 
Each ratio is quoted in two to five decimals and also comes in a flipped over version, which creates a new currency pair that moves in the opposite direction. To follow our example, EUR/USD measures the value of the euro against the U.S. dollar while USD/EUR measures the value of the U.S. dollar against the euro. Therefore:
 
Before starting forex trading, it's important to understand what a currency pair is and how it works. In FX trading, currencies are always traded in pairs. The base currency is the first currency of a currency pair. The quoted currency is the second currency of a pairing. For example, in EURUSD', Euro (EUR) is the base currency, and the US dollar (USD) is the quote currency.
 

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