Currency pairs

Understanding what currency pairs are in the forex market is essential to your success investing in the largest financial market in the world. In order to trade in the forex market a clear concept of the mechanics of currency trading are a must.

The first aspect of forex trading that should be clear is that trading in this market is an exchange, this is why it is called foreign exchange. As a result currency comes in pairs. This concept is one of the biggest obstacles for most experienced traders to overcome mentally when it comes to currency trading. When you trade on the forex market it is a simultaneous purchase and sale. Why is this so hard to comprehend for experienced investors> Because it is so different from stock purchase and sale.In the equities market, if you buy a stock, you then own it, and you then wait for prices to go up. If you want to exit your position, you sell what you bought before. It is a very simple concept to grasp. In the currencies market, when you buy a currency, you immediately sell another. Then you wait for it to go higher, but higher against another currency (any other currency).

Currencies do not involve a simple purchase or sale, rather an exchange. You exchange one for another. The best way to help an experienced investor to understand this is to look at stocks as one currency, and the cash used to buy the stocks as the other. Thus you would say, you are selling cash to buy a stock, then selling a stock to buy cash. When you buy a stock you are waiting for it to go higher against cash. This makes it easier to understand, wrap the mind around, and thus move forward with.

Forex has simplified thing by assigning names that combine the two currencies being traded against one another with the most common currency pairs being assigned nicknames and abbreviations as well. The International Standards Organization, ISO, has standard codes for each currency.

Of course on the currency market there are hundreds of currencies available for trade, but all major currency pairs involve the USD the U.S. Dollar. However, not all currencies are interesting to traders. All major currency trading involves the USD, the pairs that do not include the USD are referred to as cross-currency pairs. The most actively traded cross currency pairs, are the EUR, JPY, and GBP. These help traders to target individual currencies in order to take advantage of news and events. Cross rates are derived from respective USD pairs, but are quoted independently.

In addition, currencies have a base and counter currency in each pair. This will denote which is being bought or sold, and what currency denomination profit and loss is calculated in.

Understanding currency pairs and the nuances of pairs in the forex market will help you be a more savvy trader.