The exchange rate is therefore a ratio of one currency against the other. Essentially, it is this ratio that you buying and/or 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 on the trading platform).
As this is what we are trading, it is vital that we are able to read a currency pair correctly – so we know how much of which currency we will get in return for another.
This is a good point to mention that in Forex trading – you don’t ever actually physically swap currencies, you are just trading the speculation!
In this example we are comparing the Great Britain Pound (£) vs US Dollar ($).
As you can see that the price to sell this currency pair is:
£1:$1.21720 (If you think the price will go down)
Therefore, for every 1 Pound we would get 1.21720 Dollars.
To buy this currency pair, the price is:
£1:$1.21728 (If you think the price will go up).
Therefore, for every 1 Pound we would get 1.21728 Dollars.
We will speak about why there is a difference between the price to buy and the price to sell a currency pair soon!
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. Including;
EUR – Euro
TRY – Turkish Lira
CHF – Swiss Franc
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 ($) – with the other currency being one use by 4 major world economies.
There are 4 major currency pairs;
- EUR:USD – The Euro (€) and the US Dollar ($) | 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.