How To Read Forex Currency Pairs

How To Read Forex Currency Pairs – As the name “forex” indicates, transactions in the forex market all involve the exchange of currencies, so that currencies are valued relative to other currencies and are carried out at a certain rate known as an exchange rate.

Therefore, a currency will generally be quoted relative to other currencies that can be exchanged. For this reason, all currencies exchanged in the forex market are processed in pairs commonly known among forex traders as currency pairs.

How To Read Forex Currency Pairs

The following sections introduce some of the basic concepts related to currency pairs, including the conventions of their notation and the importance of the order in which they appear. Market liquidity and popular nomenclature topics are also discussed below, and a list of major, minor and exotic currency pairs and crosses is provided.

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Forex currency pairs are often written by separating the three letters of the ISO 4217 currency code for each currency with a slash (“/”). For example, EUR/USD is the typical forex market notation for a currency pair consisting of the Euro of the European Union whose ISO code is EUR quoted in terms of US dollars whose ISO code is USD.

In addition, each currency pair consists of the base currency appearing before the slash and the counter currency or quote currency appearing after the slash in common market shorthand.

For the EUR/USD currency pair, the Euro or EUR is the base currency in the pair, while the US Dollar or USD is the counter currency in the pair quoted relative to the base currency.

The prevailing forex market quote conventions give priority to certain currencies over others, which affects whether they are typically quoted as the base currency or the counter currency in a currency pair.

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According to this traditional pecking order, the foreign exchange market usually quotes the EUR/GBP and USD/CHF currency pairs in that order, not as GBP/EUR or CHF/USD. In the case of the EUR/GBP currency pair, EUR appears first in the currency pair because it is higher in the pecking orders mentioned above than GBP.

In addition, most minor currencies are quoted as counter currencies in currency pairs with the US dollar acting as the base currency. Examples are USD/SGD for the US Dollar/Singapore Dollar exchange rate and USD/SEK for the US Dollar Swedish Krona exchange rate.

Before executing foreign exchange transactions, traders must first obtain a quote from the market maker. They usually do this by communicating the desired currency pair and the amount of one of the coins to be exchanged to their counterparty.

Retail forex traders will usually have an online forex broker as their counterparty for transactions and may use an e-trading platform such as Metatrader to get the quotes they need.

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Accepted quotes are usually expressed as the number of units of the base currency required to purchase one unit of the counter currency. For example, a quoted exchange rate of 1.1500 for the EUR/USD currency pair means that each EU Euro is worth 1.1500 US Dollars. Therefore, 10 million euros can be exchanged for 11.5 million US dollars at that exchange rate.

Participants in the forex market sometimes differ on which currency pairs they consider major, minor or exotic. However, in most cases, these broad categories describe currency pairs that are highly liquid, moderately liquid, or relatively illiquid, respectively.

Furthermore, in the context of the currency market, the term “liquidity” refers to the extent to which the foreign market is able to trade buying or selling transactions without causing a substantial change in the exchange rate of the currency pair in question.

In practice, the liquidity of the forex market is a function of the number of market markers available to quote a particular currency pair and their willingness to accommodate large transactions without moving exchange rates much.

What Are Forex Minor Pairs?

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The forex market for major currencies – such as EUR, GBP, CHF, JPY, AUD, CAD, and NZD – tends to be very liquid, so EUR/USD, GBP/USD, USD/CHF, USD/JPY currency pairs , AUD/USD, USD/CAD and USD/JPY are considered important currency pairs by most forex traders.

The next lower level of liquidity is shared by minor currency pairs, which include so-called cross-currency exchange rates that do not involve the US Dollar. Some traders include NZD/USD in this classification, while others place it among the major FX pairs, as it remains popular with traders and tends to enjoy a fairly liquid market as a result.

Cross currency pair traders typically experience less liquid trading conditions and wider spreads than those enjoyed for major currency pairs. Cross rates can be derived from the more liquid market of its quoted component currency against the US dollar.

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Examples of highly liquid crosses that do not involve the US Dollar include the currency pairs EUR/JPY, EUR/CHF, EUR/GBP, and GBP/JPY. Less liquid cross-currency pairs include, for example, the AUD/JPY and GBP/CAD currency pairs.

Relatively illiquid markets exist for the most liquid of the currency pairs commonly known as exotic currency pairs, and transaction spreads can be much wider for these pairs as a result. Exotic currency pairs usually consist of the currency of a smaller or developing economy, paired as a counter currency with a major currency such as the US dollar or Euro that acts as a base currency. Examples of exotic currency pairs include: USD/SGD which refers to the US Dollar/Singapore dollar exchange rate and EUR/TRY which refers to the European Union Euro/Turkish Lira exchange rate.

The three tables below contain the author’s attempt to list major forex pairs, a list of minor forex pairs, and a list of exotic forex pairs. Together, they fairly accurately reflect the major currency pairs traded in the foreign exchange market today.

Those new to forex trading often ask experienced traders about the best forex pairs to trade. Wise traders will explain that the best answer will often vary depending on the individual’s preferred trading style, the strength of the trading opportunities they have identified, and the time frame they expect to hold the position.

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For example, a trader using a scalping strategy that has a short average trade duration will usually look for the best deal spreads and the ability to trade large amounts very quickly. Such traders may limit their trading activity to the most liquid traded currency pairs such as EUR/USD and USD/JPY. These popular forex pairs have the tightest trading spreads and their market can handle very large amounts due to the large number of well capitalized market makers and other participants.

At the other end of the trading spectrum, long-term trend traders who see excellent directional opportunities arising in exotic currency pairs may do very well to invest a portion of their account capital to trade these pairs according to their brand display. However, since many exotic currency pair markets are illiquid, they can keep their position sizes simple and be prepared to trade with wider transaction spreads when entering and exiting their positions.

Those who primarily trade for a time frame somewhere between the two extremes can find emerging trading opportunities in one of the most traded currencies listed in the table above offered by any forex broker or their market maker. However, if the width of the spread can have a significant impact on their overall trading profitability, then they may want to focus their trading activity on the major currencies, not on minor or exotic currency pairs.

Professional forex traders tend to be very colorful individuals, and they often refer to major currencies and currency pairs by their traditional nicknames. Beginning traders should be prepared to understand this important forex market jargon before speaking with a dealer or market maker who works at a financial institution.

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First of all, the currency of the US dollar is often referred to by forex traders as “Greenback” or “Buck” in the singular, and they add an “s” to the end of the nickname to form the plural. Also, Pound Sterling is usually called “Quid” by dealers, which is the plural term, while Swiss Franc is known as “Swiss”, which is also plural.

The euro currency of the European Union does not have a common nickname, so it is simply called “Euro”. The plural can be “Euro” or “Euros”, as this is a relatively new currency name, and the plural does not seem to be standardized. Similarly, Japanese Yen is simply referred to as “Yen”, which is a plural term. Canadian, Australian and New Zealand dollars are commonly referred to as “Loonie”, “Aussie” and “Kiwi”, all of which are multilingual nicknames.

With respect to major crosses, EUR/JPY and GBP/JPY are sometimes called “Yuppy” and “Guppy” respectively, while the EUR/GBP pair has been given the “Chunnel” as a popular nickname.

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