Currency pairs are the foundation of forex trading. When you trade forex, you're essentially buying one currency while selling another. This article will help you understand how currency pairs work and how to read them effectively.
What is a Currency Pair?
A currency pair consists of two currencies, where the first currency is called the base currency and the second is called the quote currency. For example, in the EUR/USD pair:
- EUR is the base currency
- USD is the quote currency
Major Currency Pairs
The most commonly traded currency pairs are known as the "majors." These include:
- EUR/USD (Euro/US Dollar)
- GBP/USD (British Pound/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- USD/CHF (US Dollar/Swiss Franc)
Understanding Pip Values
A pip is the smallest price move that a given exchange rate makes based on market convention. Most major currency pairs are priced to four decimal places, and the pip is the last decimal point.
Trading Currency Pairs
When trading currency pairs, you're speculating on whether the base currency will strengthen or weaken against the quote currency. If you believe the base currency will strengthen, you go long (buy). If you think it will weaken, you go short (sell).
