LESSON 5. Currency pairs. Base and quote currencies. Majors and crosses. Metals and CFD
Currencies on the FX market are always traded in pairs. In order to find out the relative value of one currency, you need another currency to compare.
When you buy one currency, you automatically sell another currency.
Currency pairs in Forex are given in abbreviations.
For instance, EUR/USD stands for the euro versus the US dollar, and USD/JPY stands for the US dollar versus the Japanese yen.
If we buy EUR/USD, we are buying euros and selling dollars. If we sell EUR/USD, we are selling euros and buying dollars.
The first currency in the pair is called the base currency, while the second currency is called the quote currency. Price of the base currency is always calculated in units of the quote currency.
For example, the exchange rate for the EUR/USD pair is 1.1000. It means that one euro costs one dollar and 10 cents.
It is usual to break the currency pairs into majors, crosses, and exotic pairs.
All the major pairs include the US dollar and are very popular among the traders: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD etc.
Crosses consist of two popular currencies, but do not include the US dollar. The most common crosses include euro, yen and British pound: EUR/GBP, EUR/JPY, GBP/JPY, EUR/AUD etc.
Exotic currency pairs consist of one major currency and one currency, representing the developing (Brazil, Mexico, India etc.) or small (Sweden, Norway etc.) economy.
Exotics are rarely traded on Forex and usually have less attractive trading conditions.
In addition to currency pairs, you can also trade metals and CFD (contracts for difference) through your broker.
The CFD instrument is an easy way to trade indices, shares, and other assets without physically owning them or paying for them.