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| Major currency pairs |
The foreign exchange market is traded in a very unique way when compared with other major financial markets like stocks or futures. Unlike these more traditional markets, foreign exchange trading is accomplished using the relative value of the underlying instrument, rather than the absolute value.
More specifically currencies are traded in pairs. When forex traders talk about trading the U.S. dollar, for example, they are really talking about trading the U.S. dollar ’ s relative value against another currency. This other currency could be the euro, the British pound, the Japanese yen, or even the Thai baht, among many others. The fi rst currency in a currency pair is called the “ base ” currency, while the second currency is called the “ quote ” (or “ counter ” ) currency. It cannot be emphasized enough how important it is to keep in mind that there are two integral, opposing components of a traded currency pair, instead of the single component prevalent in trading stocks or futures. When forex traders initiate market positions, it is imperative that they take into consideration the relative value of both currencies. This means that a trader should not just consider whether a currency will go up or down in value. Rather, the trader must always take into account whether the currency's value will go up or down in comparison with another currency.
For example, one of the most commonly traded currency pairs is the USD/JPY, which can be described in longhand as the U.S. dollar against the Japanese yen. If traders maintain the view that the value of the U.S. dollar will rise in relation to the Japanese yen, they will buy the USD/JPY pair. Conversely, if they think that the U.S. dollar will fall in relation to the Japanese yen, they will sell the USD/JPY pair.
Logically, by the same token, if traders believe that the yen will rise in relation to the dollar, they will sell USD/JPY. And if they think the yen will fall against the dollar, they will buy USD/JPY. At first this may appear confusing. But if one considers currency pairs as a coupling of polar opposites, it becomes a lot easier to grasp with some time and experience.
As a point of reference, the top tier of currency pairs are the four “ majors, ” which consist of the most traded, and therefore most liquid, U.S. dollar - based pairs. These are EUR/USD (euro against U.S. dollar), USD/JPY (U.S. dollar against Japanese yen), GBP/USD (British pound against U.S. dollar), and USD/CHF (U.S. dollar against Swiss franc). Then, there are the “ semi - major ” pairs, which also contain the U.S. dollar but are not traded as actively as the majors. These include USD/CAD (U.S. dollar against Canadian dollar) and AUD/USD (Australian dollar against U.S. dollar). After these, there are the many significant “ crosses ” which, by definition do not contain the U.S. dollar. Crosses include EUR/ GBP (euro against British pound), AUD/NZD (Australian dollar against New Zealand dollar), CAD/JPY (Canadian dollar against Japanese yen), GBP/CHF (British pound against Swiss franc), and EUR/JPY (euro against Japanese yen), among others. And finally the exotics, which are thinly traded on the global forex market compared to the more popular majors and crosses, round out the currency pair list. These pairs include such currencies as the Hungarian forint (HUF), the Malaysian ringgit (MYR), and the South African rand (ZAR), among numerous others.
