Forex Currency Trading Pairs

Forex currency pairs in Forex trading have been standardized by the IMF (International Monetary Fund). The most commonly traded currency pairs are:

USD/CHF, U.S. dollar and Swiss franc (sometimes called Swissie)
GBP/USD, British pounds and dollars (sometimes called cables)

These currency pairs account for 80% of all trades in the Forex market. They all involve the U.S. dollar as it remains the world’s largest economy and one of the most attractive to trade. But it’s also a continuation of the 1944 Bretton Woods agreement, which pegged all currencies to the dollar as a benchmark. Although the Accord was abandoned in the early 1970s, some of its influences are still evident in the market.

The first currency in the pair is called the base currency and it is the important currency. Its value is always 1 in the exchange rate, and it controls the direction of trades and charts. The second currency is called the cross. For example, in GBP/USD, GBP is the base currency and USD is the cross currency. If the price of the currency pair is 1.7609, it means that a pound is worth $1.7609. If the chart goes up, it means GBP/USD is strengthening; if it goes down, USD/GBP is strengthening.

Because a purchase automatically includes two currencies, one traded against the other, profiting in a bear market is like being in a bull market. For the same reason, short selling is not prohibited in Forex as it is in the stock market; it is built into the system.

Prices are measured in pips, an acronym for Price Point of Interest, the smallest number in a price. This is an important point because not all pips are the same; they reflect the base currency of the pair. If USD is the base currency, then 1 pip equals 1 USD in Mini accounts and 10 USD in Standard accounts. If you trade in one of these currencies and earn 50 pips, the profit will be $50 on the mini account and $500 on the standard account.

But if the base currency is not the US dollar, then one point is worth one unit of the base currency. In GBP/USD, because GBP is the base currency, 1 pip equals 1 GBP; in AUD/USD, 1 pip equals 1 AUD. So when you make a profit in these currencies, you make your profit in the base currency, which you then have to convert to USD at the current exchange rate.

This entry was posted in Forex Currency Trading. Bookmark the permalink.