How Currency Pairs Work? | PIP-ACADEMY
Length : 3.00 Minutes 

How Currency Pairs Work?

Each forex pairs, will have a market price associated with it, that is called exchange rate. An exchange rate is simply the ratio of one currency valued against another currency.

For instance, the EUR/USD exchange rate indicates how many Euro can purchase one U.S. Dollar. All the currencies are always quoted in pairs, thus for every transaction in the Forex market you are simultaneously purchasing one currency and selling another.

Therefore, If we assume the price of the EUR/USD currency pair is 1.1458, this means that one has to pay 1.1458 US dollars to buy one euro. 

On the other hand, to find out how many euros it costs to buy one U.S. dollar, simply flip the pair to USD/EUR by dividing 1 by 1.1458  (1/1.1458=0.8727) which equals to 0.8727. Therefore, one has to pay 0.8727 Euros to buy one US dollar.

Formula: 

EUR/USD: 1.1458

USD/EUR: (1/1.14580) = 0.8727

Let’s take a look at the illustration below.

Base Currency/Cunter currency

 

For all the currency pairs, the first currency on the left is called "base currency", and the one on the right is the "counter currency". 

When buying (going long), the exchange rate indicates how much you have to pay in the units of counter currency to buy one unit of base currency.

 

One the other hand, when selling (going short), the exchange rate indicates how many units of counter currency you will receive for selling one unit of base currency.

The base currency is the “basis” for the buy or the sell. 

Symbols in FX market

 

The Forex market uses symbols to designate specific currency pairs. The United State dollar is symbolised by USD, the Euro is shown as EUR, and so the Euro/U.S. dollar pair is shown as EUR/USD.

 

Below is the list of other commonly traded currency symbols: 

 

Australian dollar = AUD

British pound = GBP

Swiss franc = CHF

Canadian dollar = CAD

New Zealand dollar = NZD

and Japanese yen = JPY.

The price of the currency pair constantly fluctuates, as transactions occur around the globe, 24-hours a day, 5 days a week.

There are many currencies that one could trade in the forex market. These currencies are generally categorised into three different categories such as major, minor and exotic currencies. 

We will discuss about them in the next topic. 

Summary:

 

  1. Each forex pairs, will have a market price associated with it, that is called exchange rate. 

  2. The exchange rate indicates how much you have to pay in the units of counter currency to buy one unit of base currency.

  3. The exchange rate indicates how many units of counter currency you will receive for selling one unit of base currency. 

  4. The base currency is the “basis” for the buy or the sell. 

  5. All the currencies are always quoted in pairs.

  6. The Forex market uses symbols to designate specific currency pairs.

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