What are Currency Pairs?
Currency Pair is the quote of one currency relative to the other currency. In the Forex market, all currency are traded against each other, therefore being called 'currency pairs'. So when you are trading in the forex market you are actually trading 2 currencies simutaneously.
For example: USD/ZAR is a currency pair where US Dollar is being traded again the South African Rand. When the price of USD/ZAR currency pair is rising then it means that US Dollar is getting stronger against the Rand, and vice versa in case the USD/ZAR's pair is going down.
There are other terms like a Base Currency, Quote Currency, majors, minors etc. Let's get to them.
Currency Pairs Lingo
Here we will explain all the important terms that you must know before understanding more about forex trading. You will hear a lot of these terms commonly while trading, so let's start.
Currency Pair Terms:
1) Base & Quote Currency: In every currency pair like EUR/USD, USD/ZAR, the first currency mentioned is the ‘Base Currency’ which is being compared to the second currency called ‘Quote Currency’.
For example, in EUR/USD, Euro is the Base Currency and the US Dollars is the Quote Currency.
If you hear the local business news or a trader talks about the currencies like: "The South African (ZAR) edged higher againt the Dollar today, reaching a two-week high of 14.454"
It simply means that the South African Rand has appreciated in value against the US Dollar, where it’s valued currently at 1 USD at 14.454 ZAR.
2) Bid & Ask prices: 'Bid price' is the market price at which you can sell the base currency. And 'Ask price' is the price at which you can buy the base currency in the pair. For ex: If you want to trade USD/ZAR then the forex broker will quote you 2 prices, one will be the bid price & the other will be the ask price. Bid price is always lower than the ask price.
3) Spread: Spread is the difference between the ask and the bid price. This is the fees charged by the forex brokers for each trade trade, and it depends on the market liquidity, and the currency pair that you are trading. The lower the spread, the better it is for you.
4) Pips: Pip stands for Percentage in Point, and it is the most common term in forex trading. Simply put, 1 pip is the smallest measure at which the market moves. It is normally the change/fluctuation in points of the last decimal for a currency pair.
For example, if the EUR/USD moves from 1.3456 to 1.3459 it moved by 0.0003 points, which will be equivalent to 3 Pips. For the currency pairs that are quoted to 4 decimals like EUR/USD, USD/ZAR, the movement in the last decimal is 1 pip (1.1000 to 1.1001).
The brokers quote their spread in Pips, and your trading profit/loss would also be in pips. It is important to select a broker that charges the lowest spread in pips. We will explain this more in the chapters below. So, don't worry if you don't understand this now.
Majors, Minors & Exotic Currency Pairs
1) Major Currency Pairs: The major pairs are most highly traded currency pairs in terms of global trading volume, and they account for a volume of around 70%.
The are are 7 major currency pairs, and these are generally the currencies of most stable and well-developed economies. The major currency pairs include: EUR/USD (Euro Dollar against the US Dollar), USD/JPY (US Dollar against the Japanese Yen), GBP/USD (Great Britain Pound against the US Dollar), USD/CHF (US Dollar against the Swiss Franc), AUD/USD (Australian Dollar against the US Dollar), USD/CAD (US Dollar against the Canadian Dollar), NZD/USD (New Zealand Dollar against the US Dollar).
2) Minor Currency Pairs/Cross Pairs: Cross currency pairs are the crosses of currencies in the majors but doesn't include USD. They are typical less liquid and more volatile than the Major pairs.
The minor/cross currency pairs account for almost 15% of global forex trading volume. The important cross pairs are: EUR/GBP (Euro against the Great Britain Pound), EUR/JPY (Euro against the Japanese Yen), GBP/JPY (Great Britain Pound against the Japanese Yen), NZD/JPY (New Zealand Dollar against the Japanese Yen), CAD/CHF (Canadian Dollar against the Swiss Franc), AUD/JPY (Australian Dollar against the Japanese Yen).
3. Exotic Pairs: Exotics are generally major paired against a currency of emerging economy. The examples include: USD/ZAR – (US Dollar against the South African Rand), GBP/NOK (Great Britain Pound against the Norwegian Krone) etc. In South Africa, USD/ZAR is an important currency pair.