The Foreign Exchange Market exchanges one currency for another currency such as the European Euro (EUR) for US dollar (USD), or Great Britain Pound (GBP) for Japanese Yen (JPY). These currencies are paired up by their nicknames so If you are trading EUR/USD, you are exchanging Euro for Dollar and would be read as EUR/USD. These are known as Quotes or Pairs.
EUR is the Base Currency. USD is the Quoted Currency. For example, if the current price is 1.2054 then for 1 EUR is equivalent to 1.2054 USD. This price constantly changes and the movement of price is measured by percentage in points or pips.
A pip is the smallest price movement in the forex market. A pip is practically equivalent to 1 of the 4th decimal (0.0001). Some are quoted with 2 decimal places (0.0100) like the Japanese Yen (JPY). The price of the market is usually seen on the right side of the platform you are analyzing the chart on.
For example, if you bought EUR for 1.2000 and the value of Euro increased, closing your trade at 1.2055, you just caught 55 pips!
1.2055 – 1.2000 = 0.0055 pips
The movement of the market is determined by a country’s level of economic health. Some of the leading factors that determine the market movement and volatility are Inflation Rates, Interest Rates, Government Debt, Terms of Trade, Political Performance, Recession, and more. These are also major economic factors that determine the strength of a country’s currency.
These forex quotes are grouped into different categories based on the currency they are paired. The Major Pairs are pairs exchanged with the USD. These are the most commonly trader pairs because they often have low spreads or brokerage costs. Here are some examples of major pairs:
EUR/USD – EURO / US DOLLAR
USD/JPY – US DOLLAR / JAPANESE YEN
GBP/USD – GREAT BRITAIN POUND / US DOLLAR
USD/CHF – US DOLLAR / SWISS FRANC
AUD/USD – AUSTRALIAN DOLLAR / US DOLLAR
USD/CAD – US DOLLAR / CANADIAN DOLLAR
NZD/USD – NEW ZEALAND DOLLAR / US DOLLAR
Cross Pairs or Minor Pairs are pairs that do not involve the USD as the base currency with the exchange. The most commonly traded minor pairs are the euro, yen, or pound. Here are some examples of cross or minor pairs:
GBP/JPY – GREAT BRITAIN POUND / JAPANESE YEN
GBP/NZD – GREAT BRITAIN POUND / NEW ZEALAND DOLLAR
GBP/AUD – GREAT BRITAIN POUND / AUSTRALIAN DOLLAR
AUD/JPY – AUSTRALIAN DOLLAR / JAPANESE YEN
AUD/NZD – AUSTRALIAN DOLLAR / NEW ZEALAND DOLLAR
AUD/CAD – AUSTRALIAN DOLLAR / CANADIAN DOLLAR
Exotic Pairs are pairs that include a major currency and a developing economy’s currency. These exotic pairs often have high spreads when trading them. Here are some examples of exotic pairs:
AUD/MXN – AUSTRALIAN DOLLAR / MEXICAN PESO
USD/HKD – US DOLLAR / HONG KONG DOLLAR
EUR/TRY – EURO / TURKISH LIRA
JPY/NOK – JAPANESE YEN / NORWEGIAN KRONE
GBP/ZAR – GREAT BRITAIN POUND / SOUTH AFRICAN RAND
NZD/SGD – NEW ZEALAND DOLLAR / SINGAPORE DOLLAR