Currency trading
What are currency pairs?
In the foreign exchange market, currency is traded in pairs. Pairs have meaning in relation to each other so must always stay together.
The two currencies in a pair are traded one against the other. The rate at which they are traded is called the exchange rate. The exchange rate is affected by currency supply and demand.
Most common currencies
The most common currencies traded in the market are called ‘majors’. Most currencies are traded against the United States dollar (USD). USD is traded more than any other currency. The five currencies most traded next are: the euro (EUR); the Japanese yen (JPY); the British pound sterling (GBP); the Swiss franc (CHF), and the Australian dollar (AUD). Trades of the six major currencies total 90% of the market.
The most common currency pair is EUR/USD.
The exchange rate
The exchange rate is always changing. The value of one currency is determined by market supply and demand forces, by comparing it to another currency. In a currency pair, the first currency is called the ‘base currency’; the second currency is called the ‘quote currency’ or ‘counter currency’.
When you buy a currency pair, you buy the base currency and sell the quote currency. The exchange rate tells buyers how much of the quote currency they need to buy one of the base currency. The order in a pair always stays the same, being a common approach by the industry. USD/JPY, for example, is a pair (USD = base, JPY = the quote). The order within the pair, in the way you use the term, does not change. So you either BUY it or SELL it, depending on the direction of the trade. For example: USD/JPY – you either BUY JPY using USD or you Sell JPY to get USD.
Here is an example: EUR/USD 1.2500 means you need 1.25USD to buy one euro. It also means if you sell one euro you get 1.25USD. All trades involve buying one currency and selling another currency at the same time. If in the next day the Euro is rising against the USD and the exchange rate is now 1.26, for every 1 Euro that you bought, you have earned 1USD cent. Or, if you traded the opposite direction, for every EUR that you sold (at 1.25) you lost 1USD cent (since you “buy” back the EUR for 1.26).
Buy and sell currency
Traders in the foreign exchange market buy and sell currency to try to make profit. There are two prices for currency: the buy price, called the ‘BID’; and the sell price, called the ‘ASK’.
The difference between the ‘bid’ and the ‘ask’ is called the ‘spread’. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.
For example: the EUR/USD bid/ask rate is 1.2100/1.2200. The market maker gives $1.21 when buying from the trader, but takes $1.22 when selling to the trader. If traders buy and sell immediately without any change in the exchange rate, they lose money. This happens because of the spread – traders pay more to buy the currency than they receive when they sell in that one moment.
In fact, the spread is the leading source of income for the market maker. Like any other market, the merchant will buy at one price and sell at a higher price.
Quotes
The price of a currency is called the ‘quote’. There are two forms of quotes in the Forex market: direct quotes, and indirect quotes.
A direct quote is the price for one US dollar in terms of another currency.
An indirect quote is the price for one UNIT of another currency in terms of the US dollar.
Please note: in general, most currencies are quoted against the USD (e.g. – “direct quote”).
But, the EUR, GBP, AUD, NZD (as well as Gold XAU and silver XAG) are indirect quoted, for example: GBP/USD.
The quote is the price to a currency pair that the deal will be made with. This is unlike an ‘indication’, where the price given by a market maker is only informational (for trader’s knowledge, rather than for execution).
What is e-currency?
E-currency is money that is exchanged on computers. ‘E’ is the first letter of the word ‘electronic’ and ‘currency’ is a money system. You can think of e-currency as Internet money.
Buying and selling products and services on the Internet is possible because of e-currency. In the present time, more security on the Internet means more people are now buying and selling online. Modern security means it is now safer to deal on the Internet, but there are still some risks involved.
Credit cards are a popular example of e-currency. E-wallets (online money vendors) is another.
Benefits of e-currency
With e-currency, banks now offer services where customers can send money from one place to another without using cash. Using e-currency, customers can pay bills, change money from one account to another, and pay for things they want to buy such as food, a car, a television or a service such as Forex Trading.
It is now quite easy to exchange money all over the world using e-currency. Modern technology makes money exchange fast and secure.
How is e-currency used in the Forex market?
In the online Forex market, e-currency is the main form of money used. All trading is done on computers using the Internet. Forex traders can still deposit money into their account at the market maker in the old fashioned way (e.g. – via bank wire, or by sending checks by mail). Once such deposit is accepted – they can trade Forex online. Most traders, however, use their credit card or other form of e-currency to deposit funds to their Forex account. Once a trader wishes to withdraw funds, they are wired directly to the trader's bank account.
E-gold and e-silver
E-Gold and E-Silver refer to Forex trading of Gold (XAU) and Silver (XAG). Since this is “Forex trading” or “OTC” (meaning “over the counter” and not via an exchange or a stock market), no actual metals (such as real gold or real silver) are traded. What is traded is a contract of their price. The unit for such XAU or XAG is one ounce (about 30 grams). Units of XAU and XAG are quoted and traded in USD.
Trading in gold and silver is electronic, the same as other currencies. Gold and silver are traded against the United States dollar only. You do not buy and sell the physical thing. Think of the gold and silver as another form of e-currency. The sign for e-gold is XAU; the sign for e-silver is XAG.
What is exotic currency?
Exotic currency is currency that is not common in the foreign exchange market. Exotic currency is usually from developing countries such as parts of Asia, the Pacific, the Middle East and Africa.
It is not as easy to trade exotic currency because the market does not have the same amount of activity for exotic currency as it does for main currencies. The main currencies include ‘majors’ and ‘minors’.
Major currencies are the ones most commonly traded. They include the United States dollar (USD), the euro (EUR), the Japanese yen (JPY), the British pound sterling (GBP), and the Swiss franc (CHF). Some groups also include the Australian dollar (AUD) as a major currency, though it is often considered a minor. Minor currencies also include the Canadian dollar (CAD) and the New Zealand dollar (NZD).
Exotic currencies are neither major nor minor, but they are still important in the Forex market.
What makes exotic currency trading different?
Exotic currency trading is different from trading in major currencies because of the level of interest in exotic currencies in the market. The relative lack of activity in the exotic currency market means the currencies can have a high cost and can carry a high risk.
High risk creates opportunities for high profits. But the exotic currency market is not easy to understand completely. It is not secure. The political and financial environments in developing countries may change quickly and cause the country’s currency to rise or fall in value.
Exotic currency rates
Exotic currency rates have bigger spreads than the main currencies. So, it is important to trade exotic currency with care and take into account the higher spread when calculating the potential profit. The spread represents the difference between what the market maker gives to buy from a trader, and what the market maker takes to sell to a trader.
Cross rates
Most currencies are traded against the US dollar in a currency pair. Any quote that is not against the US dollar is called a ‘cross quote’. An example is GBP/JPY (British pounds/Japanese yen).
The quote is made by measuring the British pound against the US dollar, then the Japanese yen against the US dollar.
The result is a cross quote:
GBP/USD = 1.7464
USD/JPY = 112.29
So the cross quote is: GBP/JPY = 1.7464 x 112.29 = 196.10
This means that one British pound is worth 196.10 Japanese yen.
Currency Acronyms and Abbreviations
All currencies around the world have an internationally accepted 3 letter acronym. The first 2 letters abbreviate the country name and the last is the name of the currency. For example: GBP is Great Britain Pound. This is the ISO 4217 international standard. Below are the 3 letter currency codes for most of the world currencies, including gold and silver. The 6 most commonly traded currencies, the ‘majors’, are repeated at the top.
Australian Dollar AUD
British Pound GBP
Euro EUR
Japanese Yen JPY
Swiss Franc CHF
US Dollar USD
Afghanistan Afghani AFN
Albanian Lek ALL
Algerian Dinar DZD
Angolan Kwanza AOA
Argentine Peso ARS
Armenian Dram AMD
Aruban Florin AWG
Australian Dollar AUD
Azerbaijan New Manat AZN
Bahamian Dollar BSD
Bahraini Dinar BHD
Bangladeshi Taka BDT
Barbados Dollar BBD
Belarusian Ruble BYR
Belize Dollar BZD
Bermudian Dollar BMD
Bhutan Ngultrum BTN
Bolivian Boliviano BOB
Bosnian Mark BAM
Botswana Pula BWP
Brazilian Real BRL
British Pound GBP
Brunei Dollar BND
Bulgarian Lev BGN
Burundi Franc BIF
CFA Franc BCEAO XOF
CFA Franc BEAC XAF
CFP Franc XPF
Cambodian Riel KHR
Canadian Dollar CAD
Cape Verde Escudo CVE
Cayman Islands Dollar KYD
Chilean Peso CLP
Chinese Yuan/Renminbi CNY
Colombian Peso COP
Comoros Franc KMF
Congolese Franc CDF
Costa Rican Colon CRC
Croatian Kuna HRK
Cuban Convertible Peso CUC
Cuban Peso CUP
Cyprus Pound CYP
Czech Koruna CZK
Danish Krone DKK
Djibouti Franc DJF
Dominican R Peso DOP
East Caribbean Dollar XCD
Egyptian Pound EGP
El Salvador Colon SVC
Estonian Kroon EEK
Ethiopian Birr ETB
Euro EUR
Falkland Islands Pound FKP
Fiji Dollar FJD
Gambian Dalasi GMD
Georgian Lari GEL
Ghanaian New Cedi GHS
Gibraltar Pound GIP
Gold (oz) XAU
Guatemalan Quetzal GTQ
Guinea Franc GNF
Guyanese Dollar GYD
Haitian Gourde HTG
Honduran Lempira HNL
Hong Kong Dollar HKD
Hungarian Forint HUF
Iceland Krona ISK
Indian Rupee INR
Indonesian Rupiah IDR
Iranian Rial IRR
Iraqi Dinar IQD
Israeli New Shekel ILS
Jamaican Dollar JMD
Japanese Yen JPY
Jordanian Dinar JOD
Kazakhstan Tenge KZT
Kenyan Shilling KES
Kuwaiti Dinar KWD
Kyrgyzstanian Som KGS
Lao Kip LAK
Latvian Lats LVL
Lebanese Pound LBP
Lesotho Loti LSL
Liberian Dollar LRD
Libyan Dinar LYD
Lithuanian Litas LTL
Macau Pataca MOP
Macedonian Denar MKD
Malagasy Ariary MGA
Malawi Kwacha MWK
Malaysian Ringgit MYR
Maldive Rufiyaa MVR
Maltese Lira MTL
Mauritanian Ouguiya MRO
Mauritius Rupee MUR
Mexican Peso MXN
Moldovan Leu MDL
Mongolian Tugrik MNT
Moroccan Dirham MAD
Mozambique New Metical MZN
Myanmar Kyat MMK
NL Antillian Guilder ANG
Namibia Dollar NAD
Nepalese Rupee NPR
New Zealand Dollar NZD
Nicaraguan Cordoba Oro NIO
Nigerian Naira NGN
North Korean Won KPW
Norwegian Kroner NOK
Omani Rial OMR
Pakistan Rupee PKR
Panamanian Balboa PAB
Papua New Guinea Kina PGK
Paraguay Guarani PYG
Peruvian Nuevo Sol PEN
Philippine Peso PHP
Polish Zloty PLN
Qatari Rial QAR
Romanian New Lei RON
Russian Rouble RUB
Rwandan Franc RWF
Samoan Tala WST
Sao Tome/Principe Dobra STD
Saudi Riyal SAR
Serbian Dinar RSD
Seychelles Rupee SCR
Sierra Leone Leone SLL
Silver (oz) XAG
Singapore Dollar SGD
Slovak Koruna SKK
Slovenian Tolar SIT
Solomon Islands Dollar SBD
Somali Shilling SOS
South African Rand ZAR
South-Korean Won KRW
Sri Lanka Rupee LKR
St Helena Pound SHP
Sudanese Pound SDG
Suriname Dollar SRD
Swaziland Lilangeni SZL
Swedish Krona SEK
Swiss Franc CHF
Syrian Pound SYP
Taiwan Dollar TWD
Tanzanian Shilling TZS
Thai Baht THB
Tonga Pa'anga TOP
Trinidad/Tobago Dollar TTD
Tunisian Dinar TND
Turkish New Lira TRY
Turkmenistan Manat TMM
US Dollar USD
Uganda Shilling UGX
Ukraine Hryvnia UAH
Uruguayan Peso UYU
United Arab Emir Dirham AED
Vanuatu Vatu VUV
Venezuelan Bolivar VEB
Vietnamese Dong VND
Yemeni Rial YER
Zambian Kwacha ZMK
Zimbabwe Dollar ZWD