In forex trading, traders use currency pairings to quote the unit prices of currencies. Base currencies (also called transaction currencies) are the first currencies mentioned in currency pair quotations. After that comes the counter or quote currencies. Firms may use base currencies as domestic or accounting currencies. These will represent all the profits and all the losses.
For those new to forex trading, it may seem as if all of these technical terms are a little bit over your head. We are happy to break down currencies for you in this easy-to-understand guide.
If you want to trade on the forex market, you must understand currency pairs. Let’s get right into it. And there are a few definitions we must explain. We’ve also included a few examples to make the meaning of these forex terms simpler. Let’s get into it.
What does currency pair mean
Currency pairs are price quotes. These quotes are for two separate currencies exchanged on the foreign exchange market. A broker or trader will place a currency pair order. The currency that is first in the pair is the one bought. The second currency is the one sold.
What are base and quote currencies?
That first currency traded on the forex market is the base currency, which we mentioned in the previous section. Base currencies are always purchased. The second currency a broker or trader orders is the quote currency.
Traders always sell quote currencies.
Base and quote currency examples
The two most popular trading pairs are the EUR/USD pair and the GBP/USD pair. As such, we will work with these.
In the USD/EUR currency pair, the U.S. dollar (USD) is our base currency. This is the currency you buy in a trade. The Euro serves as our counter currency, the one sold. So, a 0.8472 quote means you will need 0.8472 euros to purchase one dollar.
Trading forex gives you the option to go long or to go short. That means you have to determine the weaker currency in a forex pair and the strong one.
Opening long means you are betting on a rise in your base currency. You expect the second or quote currency to fall. If you believe the U.S. currency is weak, the value will fall, and the Euro will climb, then buy EUR/USD.
To open short means you expect a dip in the value of your base currency. The second or quote currency will rise. If you believe the U.S. currency is stronger than the Euro, sell the EUR/USD currency pair.
What are the types of currency pairs
In general, forex pairings can be divided into the three groups listed below.
- The majors
- commodity currencies
- cross currencies
Since we will mention them in the text, it is prudent to explain what they mean.
The most widely traded currencies are the major currencies. Although there are differences of opinion on the number of important currency pairs, most lists include EUR/USD, GBP/USD, USD/JPY, and USD/CHF.
Commodity currencies are currency pairs whose value is strongly linked to a commodity. These currencies can be in the form of any of the materials listed below.
- Oil
- coal
- iron ore
The USD/CAD and AUD/USD currency pairs are examples of currency pairs.
Currency pairs that do not include the U.S. dollar are known as cross currencies. EUR/GBP is one such cross-currency pair. EUR/JPY is another.
What are the 8 major currencies?
The foreign exchange market is a great place to make a bit of money. But in order to do that, you need to have some information on the basics of trading there and how the whole process works. Knowing the principles of forex trading starts with the currencies traded. There are eight of them, which traders buy and sell more than others on a global scale. Let’s discuss what those currencies are below.
1. United States dollar (USD)
The United States dollar (USD) is also known as the greenback. It is the domestic currency of the largest economy in the world – the United States. It acts as a sort of benchmark for the other 8 major currencies. But these currencies, in particular, are pegged with the U.S. dollar.
- euro
- Japanese yen
- British Pound
The economic factors listed below sustain the U.S. dollar like any other currency.
- the gross domestic product (GDP)
- manufacturing
and
- employment data.
The Federal Reserve System is the primary financial agency in the United States.
2. European Euro
The Euro and the U.S. dollar are rivals. The ECB governs the monetary policies concerning the Euro. You can compare the European Euro to other currencies within its league. You will find that it is the slower of the group of eight. The British Pound, the U.S. dollar, and the Australian dollar especially are faster. The base or first currency can trade about 70 to 80 pips during an average trading day. There may be more dramatic swings that average a little over one hundred pips wide in a day.
3. Japanese Yen or JPY
The Japanese Yen is kind of complex, but it is also a very simple currency at its heart. The foreign exchange market often referred to as a carry trade element of fx. That’s because the JPY or Japanese yen competes with higher-yield currencies.
The market offers this currency at low-interest rates. Those high-yield currencies include the Australian dollar as well as the New Zealand dollar. The Japanese yen even competes with England’s Pound.
Because of that, the underlying can sometimes be erratic. Forex traders then have to take longer-term technical perspectives. The average ranges are somewhere around seventy to a hundred and forty pips during the trading day. There may even be some extremes that are well over two hundred pips. If you want to trade the JPY with a bit of bite successfully, keep your eye on the intersection of U.S. and London hours. That is between 8:00 am EST and noon.
4. Canadian Dollar (CAD)
The Canadian Dollar (CAD), or the Loonie, as it is called, is a safe currency. It almost always trades at similar ranges of fifty to one hundred pips during the trading day. Many commodities and currency prices move together. But there is one thing the Canadian dollar has going for it, and that is crude oil.
Crude oil and CAD have a special relationship. Canada is still a massive exporter of this commodity. As such, traders use the Canadian dollar to buffer against present commodity positions and sometimes pure speculation by tracing signs the oil market gives.
5. CHF – Swiss Franc
The Swiss Franc or CHF is known as the banker’s dollar. It is a lot like the Euro. In fact, these two currencies have a special relationship. The Swiss Franc very rarely ever makes any big moves during individual sessions. So you can expect it to trade at around 45 pips during the trading day. This currency’s high-frequency volume is normally reserved for the London session (3 am EST to noon EST).
6. AUD – Australian dollar and New Zealand dollar
For reasons our readers will understand in a little while, we paired the AUD and the NZD in our major currencies list.
These two currencies are favorites of carry traders. They are two currencies that give the best yields. You will see this if you compare them to the other major currencies in this list.
Because of their shared similarities, the NZD and AUD will see increased volatility during a deleveraging effect. This currency pair almost always trades in a range of seventy to eighty pips. They have strong connections to commodities as well – mostly gold and silver.
7. South African Rand
The South African Rand or ZAR is an emerging opportunity for traders. It can be a bit of a volatile currency. That’s because of its daily average range, which can be several thousands of pips high. But do not let this extensive daily range fool you. When converted to small price moves, the changes are similar to an ordinary day in England’s Pound. Its volatility makes the ZAR an excellent pair to oppose the USD. It has superb carry potential.
8. British Pound
The British Pound goes by different names. You may hear it referred to as the Queen’s currency, Cable, or Pound sterling. When compared with the Euro, we see that it is a little more volatile and almost always trades a broader range throughout the trading day. Generally, it swings in the area of about one hundred to one hundred and fifty pips. But it is not unusual for the pound sterling to trade at twenty pips.
The volatility of this major currency results from fluctuations other essential cross currencies experience. Traders often focus on these currency pairs.
pound sterling/JPY
Pound sterling/Swiss franc
As such, you will find the most volatility of this currency during the New York and London sessions. There is little movement in the Asian hours at around 8 pm EST to 4 am EST).
These are the 8 major currencies that makeup base currencies and quote currencies on the forex market.
Let’s narrow that list down to the top five major currencies on the forex market.
What are the 5 major currencies?
Each currency on the forex market has its own unique characteristics that affect its underlying value. These features also affect price movements in relation to the other currencies in forex trade. Understanding what influences the value of currencies is necessary to learn how to trade well.
- The U.S. dollar
- The Euro
- The Japanese Yen
- The Great British Pound
- The Canadian Dollar
The Australian dollar is also a major currency to consider, even if it did not make our top five list.
What are the top traded currency pairs
You always trade currencies in pairs. That’s because every time you buy one currency, you sell another. And when you sell one currency, you buy another. We’ve already discussed the basics of base currencies and quotation currencies, so we won’t go into it again.
But the prices shown for currency pairs represent the cost of quotation currency a trader needs to buy one base currency unit.
That said, here is a list of the most popularly traded currency pairs included in our list of major currencies.
- EUR/USD
- USD/JPY
- AUS/USD
- USD/CAD
- USD/CHF
- EUR/GBP
The EUR/USD pair is the leading currency pair traded on the forex pairing. But traders can choose from several other pairs if they offer high liquidity. They can still turn a profit.
If you plan to go into forex trade, there are a few things to take into consideration.
Before betting on a currency pair for trading, take a look at the variety. Traders should do their own analysis (fundamental and technical) to determine if the currency pair is a good trading option at that particular moment. You should not trade a currency pair because it is the popular option.
Look for announcements from the banks in charge of these currencies. Also, pay attention to ongoing trade conflicts.
Here is the final thing we want to mention about base currencies.
Is the base currency always 1
A lot of people learning about how to trade on the forex market ask this question. The answer is yes. The base currencies are always first when it comes to currency pairs. The quote currency is always second.
Base currencies concluded
The foreign exchange market is the largest trading market in the world. It is also the most fluid. Anyone looking to take advantage of the opportunity this forum offers to increase wealth must learn the basics of currencies traded there.
Base currencies and quote currencies (or currency pairs) are the foundation on which brokers and traders conduct their business.
There are popular currency pairs. But that does not mean they will be viable at the moment. Traders need to pay attention to trends in order to make and not lose money.
Remember the rules of trading these currencies, and you will be well on your way to becoming a successful trader.
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