The currency pair represents two currencies, one that is being sold and one that is being bought.
The first currency represented in the currency pair is the base currency also known as the transaction currency.
The second currency represented in the currency pair is the quote currency also known as the counter currency or payment currency.
A typical quote of a currency pair will detail on how many pairs of counter currency will be required to get one unit of base currency.
The counter currency is used to purchase the base currency. In other words, you exchange the counter currency for the base currency.
For instance, in quotation EUR/USD 1.2800, it states that one euro is exchanged for 1.28 US dollar. If the quote will improve from EUR/USD 1.2800 to EUR/USD 1.2810, this means that the euro is becoming stronger and the dollar is becoming weaker. Sometimes the EUR/USD quote will move from 1.2800 to 1.2790, which means the euro is getting weaker and the dollar is getting stronger.
Majors in Currency pairs are those pairs of currencies which are traded mostly; majors contribute to 90% of the total forex trading in happening. The majors of currency pairs in the current trend are EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD; however, this might vary based on the trading trends and balance of trade of countries.
Cross Rates
The currency pair which does not consist of the most traded currencies is known as the cross rate currency pair. The pairs which are traded with one of the currencies being euro are known as euro cross rates. The currency pairs, which do not have USD or EUR are known as Cross Rates.
Spread
Any quotation of a currency pair will consist of 2 prices:
- Ask price: This is the price for which the seller is willing to sell the first currency pair.
- Bid price: This is the price for which the buyer is willing to buy the first currency pair.
The difference between the Ask price and the bid price is known as the spread. The spreads provided for currencies are not the same; it varies between brokers in a bit. In cases of popularly traded pairs, the spread is going to be very less.
Pips
Pip is defined as the percentage in point and it is the minutest difference in the price move in forex trading. Most of the forex trading is carried out based on the difference in pips.
For example, consider the currency pair EUR/USD which is trading at 1.4000 and when the exchange rate increases to 1.4010, this currency pair made a 10 pips (smallest units) move in increase.
So, the pip is the minutest change apart from the fractional representation of the exchange rate of the currency. Thus, 1.4000 to 1.4010 is the identical move in pips terms like 110.00 to 110.10.
If you should estimate the pip value or how much can one pip be valued at, you need to have some extra information like:
- Trading size
- Leverage use
- Actual rate of the pair
Currency Correlation
The linear relationship between two currencies is assessed using the currency correlation. Currency correlation is assessed by virtue of its relationship with other currency pairs, commodity market, and stock markets.
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