Currency pairs are the basic tools
FOREX activity is based on the relationship of two currencies, one against the other. A FOREX trader will try to make profits by trading pairs of currencies. He will be trading USD against EUR or GBP against JPY.
The "Single" currency in itself is not interesting to the trader. For the FOREX trader a tender on pairs of currency is preferred as a means of making profit.
The basic world reserve currency is the American dollar; therefore the American currency participates in formation of all currency pairs.
The cost of a unit of one currency (named base), expressed in terms of other currency (named quoted or referred to as counter-currency) forms the basis of the quotation.There are two types of Quotations:
The direct quotation is a quantity of the national currency for one unit of the foreign currency
An example: USD/JPY, USD/CHF, etc.
The return quotation is a quantity of a foreign currency for the national unit.
An example: GBP/USD, EUR/USD, etc.
The quotation consists of two figures. The first figure Bid is the price on which the client can sell the base currency.
The second Ask or Offer is the price on which the client can buy the base currency for the quoted price. The difference between these rates is referred to as a spread. The size of a spread depends on the considered pair currencies, on the amount of the transaction and on market conditions (volatility).
Example: The Quotation of the USD/CHF pair - 1.2380/84 - means, that the client can sell dollars at the price of 1.2380 Swiss francs for 1 USD;
The client can buy dollars at the price of 1.2384 Swiss francs for 1 USD; the spread is equal to 4 points or pips.
The currency pair consists of base and quoted currencies. The base currency always costs to the first in currency pair. All operations are spent with the base currency. The currency of the quotation costs on the second place in the currency pair and in it the price of the base currency is expressed.
An Example: EUR/USD .
EUR is the base currency, USD - quoted, that is why euro is bought and dollars are sold.
Cross rates
Operations in the world market often use cross rates aganist the US dollar. The cross rates are expressed as parity between two currencies, defined on the basis of a rate of these currencies in a relation to the third currency.
An Example: EUR/CHF = (USD/CHF) * (EUR/USD)
Key rules of drawing up of the currency pairs
1. EUR always represents itself as a base currency.
2. GBP always represents itself as a base currency, except for a case with EUR.
3. JPY always represents itself as counter currency.with USD | without USD |
EUR/USD | EUR/GBP |
GBP/USD | EUR/CHF |
USD/CHF | EUR/JPY |
USD/JPY | GBP/CHF |
USD/CAD | GBP/JPY |
AUD/USD |
