Hi, it’s Henry Liu here, this is Part II of our Forex Beginner’s series… and in this section, we’ll look at some key Forex terminologies crucial to the currency market, and without further ado, let’s start with Currency Pairs.
Contrary to the stock or commodity markets, Foreign Exchange or Forex, is traded in pairs. It’s common sense really, because when you exchange money with money instead of goods, you need to specify what you are using to exchange with what… It may sound confusing at first, but just bear with me for now…
There are literally hundreds of different currencies worldwide in, but we are only going to focus on the major 8 currencies that are responsible for over 95% of the entire Forex trading volume (which is around 4.2 Trillion a day!), and these either currencies are: USD, EUR, GBP, JPY, CAD, CHF, AUD, and NZD… These currencies make up about 36 different pairs from EURUSD to AUDNZD.
EURUSD is the most popular currency pair in the world, and it represents the Euro and US Dollar exchange rate. NOTE: We trade the EURUSD pair and NOT the USDEUR pair because the Foreign Exchange market adapts a specific naming convention, and here’s the order to name the currency pairs: EUR, GBP, AUD, NZD, USD, CAD, CHF, and JPY… So EUR will always be the first of the pair and JPY will always be the last of the pair.
We can buy and sell currency pairs freely. The first currency in the pair is called the Base currency while the second is called Quote currency. (EUR / USD) The exchange rate is displayed in how much the quote currency is needed for one unit of the based currency. For instance, EURUSD at 1.4205 means $1.4205 USD is needed to exchange for one Euro.
When you BUY a currency pair, it means that you are exchanging your quote currency to the base currency, or in the case of EURUSD, you are exchanging USD to EUR. When you SELL a currency pair, you are doing the exact opposite, or in the case of EURUSD, you are exchanging EUR back to USD. So unlike buying a product or a stock certificate, you don’t have to have it first before you can sell it… It is sometimes simpler to think in term of direction, and that’s why many traders use LONG (BUY) or SHORT (SELL) to identify their trades.
If you like this tutorial, please watch the video and leave your comments below and don’t forget to check out our other videos on the Forex Terminologies series.