Currency pairs explained

When you buy stocks on a stock exchange, you pay cash for those stocks. You can choose to use any kind of currency the exchange allows, but you have to keep an eye on the value of the cash you are using to make sure you have enough to buy the securities you want. But what do you use to buy money?

Forex trading is a market that buys and sells international currency, and you need to understand the very basics of Forex if you ever hope to be successful with it. The most basic components of a Forex market are currency pairs. This is where you use one currency to buy or sell another. The process is a little complex, but it is not impossible to learn.

Currency Pairs Explained

Every Forex broker has a currency pairs list they use to transact business. All Forex transactions are done in pairs, which means that you cannot simply buy a single currency. You must leverage one currency against another in order to complete an acceptable transaction. The two currencies together are called a currency pair and understanding currency pairs is your key to understanding Forex markets.

Base Currency

A currency pair is listed by your broker as two currencies side by side. For example, USD-EUR is what a currency pair would look like that includes the Euro and the American dollar. In this currency pair, the U.S dollar is the base currency because it is the currency listed on the left. Some people refer to this as the currency that is listed first.

Quote Currency

In our example currency pair, the Euro is the quote currency. You may also see the quote currency listed as the second currency with some brokers. The USD-EUR currency pair is one of the most traded currency pairs in the Forex world, so you will see this a lot when you start dealing in Forex markets.

Currency Pairs - Base and Quote

Buying And Selling Currency Pairs

Buying and selling currency pairs has its own lingo and its own process. Once again, in order to understand the basics of Forex trading, you must understand the basics of buying and selling currency pairs.

The Bid

A Forex bid the number of units of the quote currency you will need to accumulate to purchase one unit of the base currency. For example, if the USD-EUR currency pair is listed as USD-EUR = 2, then you would need to accumulate two Euros in order to receive $1 in USD. Buying currency is also called "going long" on that currency. It is just a term that is used with no real reference to time.

The Ask

When you sell your base currency to convert it to quote currency, then this is called the ask. In our example, the ask for two units of Euro would be $1 USD. Selling a currency is also called "going short."

The Most Traded Currency Pairs

There would be around 25 currency pairs on a complete list that a broker could offer, but very few brokers offer every pair. The most traded currency pairs are USD/EUR, GBP (Great Britain Pound)/USD, AUD (Australian Dollar)/USD and NZD (New Zealand Dollar)/USD.

The USD/JPY (Japanese Yen) currency pair is also widely offered, but it can offer ups and downs that new investors may want to stay away from. Many traders stick to the majors.

Most Traded Currency Pairs

Before you start getting into Forex trading, it is important to understand the details of the market and the lingo that is being used. It can be very easy for an experienced Forex trader to sound like they are speaking a foreign language to someone who is inexperienced.

Spend time understanding the basics of Forex before you start investing your money. By becoming familiar with currency pairs and how they work, you will be laying a Forex foundation that you can use to trade international currency.

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