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As we learnt in the last lesson an ‘exchange rate’ tells us how much we will get from one currency (the base currency) relative to another (the counter currency).
The exchange rate is therefore a ratio of one currency against the other. Essentially, it is this ratio that you buying and selling in Forex trading.
The two currency’s that are being compared with one-another in an exchange rate is known as a currency pair (or a symbol in MT4).
This is vital information when looking at an exchange rate so we know which currency we will get in return for another.
The term exchange rate is more commonly referred to as price in Forex trading. Therefore, from now on we will refer to the exchange rate of a currency pair as the price of a currency pair.
In this example we are comparing the Great Britain Pound vs US Dollar.
As you can see that the price is:
£1:$1.21720 (if we sell the currency pair)
£1:$1.21728 (if we buy the currency pair).
How is a Currency Pair Composed?
A currency pair is composed of two individual ‘currency codes’ next to each other.
A ‘currency code’ is what identifies a currency and is always made up of 3 letters.
It most circumstances the first 2 letters of a currency code identify what country the respected currency is from. For example;
United States = US
Great Britain = GB
Australia = AU
New Zealand = NZ
Japan = JP
And the last letter of a currency code identifies the currency itself. For example;
Dollar = D
Pound sterling = P
Yen = Y
Peso = P
Therefore, when you combine all three letters, a currency code may look like the following;
USD – United States Dollar
GBP – Great British Pound sterling
AUD – Australian Dollar
JPY – Japanese Yen
There are a few exceptions to the currency pair rule.
EUR – Euro
TRY – Turkish Lira
CHF – Swiss Franc
There is no real reason as to why some don’t follow the rule.
As already mentioned, each currency pair is made up of two individual ‘currency codes’ next to each other. Lets have a look at some popular currency pairs, below.
EUR:USD (Euro:US Dollar)
GBP:USD (Pound sterling:US Dollar)
GBP:JPY (Pound sterling: Japanese Yen)
USD:CAD (US Dollar:Canadian Dollar)
CHF:JPY (Swiss Franc:Japanese Yen)
Now we know how to decipher a currency pair, lets have a look at how to read their prices.
As you can see from the image above, the price for buying the currency pair EUR:USD = 1:1.11455.
This means that for every €1 we will get in return $1.11455.
After waiting ten minutes, we re-check the price for buying the currency pair EUR:USD.
We can now see that the EUR:USD = 1:1.11500.
This now means that for every €1 we will now get in return $1.11500.
So, if we had waited the extra ten minutes to trade our Euros (€), then we would have received a greater amount of Dollars ($) for them than if we had traded our Euros (€) at the original rate!
After waiting a further ten minutes, we again re-check the price for buying the currency pair EUR:USD.
We can now see that the EUR:USD = 1:1.11439.
Therefore, this means now that for every €1 we will get in return $1.11439.
So, by trading our Euros (€) now, we would actually receive fewer Dollars ($) than if we had traded our Euros (€) at either of the previous 2 prices!
In Forex trading, there are hundreds of currency pairs that you are able to trade, with some being more popular than others. Currency pairs are categorised into 3 main categories: Major, Minor and Exotic.
Major currency pairs are the most commonly traded currencies in the world. All the major currency pairs feature the United States Dollar ($) – with the other currency being one used by 4 major world economies.
There are 4 major currency pairs;
- EUR:USD – The Euro (€) and the US Dollar ($) | Known as; ‘Fiber’.
- USD:JPY – The US Dollar ($) and the Japanese Yen (¥) | Known; as ‘Yen’.
- GBP:USD – The Pound sterling (£) and the US Dollar ($) | Known; as ‘Cable’.
- USD:CHF – The US Dollar ($) and the Swiss franc (Fr) | Known; as ‘Swissy’.
Minor currency pairs are slightly less popularly traded than the major currency pairs. Minor currency pairs do not feature the United States Dollar ($). Instead, minor currency pairs are currencies from other world leading economies that are compared with one another. There are many Minor currency pairs, but here are 4 commonly traded exotic pairs:
- CHF:JPY – The Swiss Franc (Fr) and the Japanese Yen (¥).
- EUR:CAD – The Euro (€) and the Canadian Dollar ($).
- EUR:JPY – The Euro (€) and the Japanese Yen (¥).
- GBP:JPY – The Pound Sterling (£) and the Japanese Yen (¥).
Exotic currency pairs are the least popularly traded currency pairs. These typically comprise currencies of developing economies paired with those of a major economy. There are many exotic currency pairs, but here are 4 commonly traded exotic pairs:
- EUR:TRY – The Euro (€) and the Turkish Lira (₺).
- GBP:ZAR – The Pound Sterling (£) and the South African Rand (R).
- JPY:NOK – The Japanese Yen (¥) and the Norwegian Krone (kr).
- NZD:SGD – The New Zealand Dollar ($) and the Singapore Dollar ($).
– An exchange rate is composed of a ‘currency pair‘.
– The term exchange rate is more commonly referred to as price in Forex trading.
– A currency pair comprises two individual ‘currency codes’ next to each other.
– A ‘currency code‘ is what identifies a currency, it is always made up of 3 letters (first 2 letters = country, last letter = currency).
– Currency pairs are categorised into: MAJOR, MINOR and EXOTIC.