Currency Pairs

So far, I have shown you what the Forex market is and what its hours are. Now it’s time to look at what is actually traded in Forex: currency pairs.

You already know the US Dollar, the British Pound, and the Euro. All three of these currencies are traded on the Forex market. To make things easier for traders, banks, and brokers, they use an ISO code for each currency. An ISO code is a simple abbreviation of the currency name, such as USD for the US dollar, GBP for the British pound, and EUR for the Euro.

Generally speaking, currency codes are easy to remember. However, there are a few tricky ones, like the Swiss Franc, which has an ISO code of CHF. Below is a table with all the major currencies and their currency codes.

There are many more currencies, but as a new trader you will want to stick to the most liquid and frequently traded currencies. Also, these currencies are amongst some of the cheapest to trade, purely because they are traded frequently.

Currency pairs

In Forex, currencies are quoted in pairs. This is because you can only value a currency relative to other currencies.

If you ask how much one US dollar is worth in US dollars, the answer is, of course, $1. However, if you ask how much one US dollar is worth in Euros the answer would be €0.76 Euros (at the time of writing). This is why currencies are quoted in pairs. You can only assess the value of a currency when it is paired with another currency.

So, what exactly is a currency pair in Forex? It’s simple and an abbreviation of a sentence like this one.

One British Pound is currently worth 1.65 U.S. dollars.

This is abbreviated to: GBP/USD = 1.6567

Simple right?  Currency pairs allow us to quickly see one currency's value relative to another.

When looking at a currency pair, the first currency is known as the base currency, and the second is the quote currency. Using GBP/USD as an example, GBP is the base currency, and USD is the quote currency. The rate is simply how much one unit of the base currency is worth when exchanged for the quote currency. So, take a look at the currency pair and rate below.

EUR/USD = 1.3137

EUR is the base currency, USD is the quote currency, and €1 is worth $1.3137 US.

Currency Pairs you should know

Major Pairs

Yen Cross Pairs

Pound Cross Pairs

Euro Cross Pairs

Other Cross Pairs

Using Currency Pairs to Take Long or Short Trades

In the Forex market, you can both buy and sell currencies. This is typically called going Long (buying) or going Short (selling). And, you can make a profit from selling!

So far as you should know, when looking at GBP/USD:
GBP is the base currency.
USD is the quote currency.

This means that 1 GBP is worth whatever the exchange rate is at the time in USD.

When you trade a currency pair, you are effectively doing the following:
Long or Buy = buying the base currency and selling the quote currency.
Short or Sell = selling the base currency and buying the quote currency.

This means if you think the value of GBP is going to increase in relation to the value of USD, you’d buy the currency pair. You’d also buy the pair if you think USD is going to weaken in relation to GBP. This is because you will now get more US Dollars per pound.

On the other hand, if you think GBP is going to weaken in relation to USD, then you’d sell the currency pair (the equivalent of selling GBP and buying USD). You’d also sell the pair if you thought USD was going to strengthen against GBP. Then, when the pair has fallen, you buy it back at a lower price and pocket the profit (from buying GBP and selling USD).

If this is still confusing, don’t worry. You will learn more about this in the coming articles.