Things to know about currency pairs in Forex

June 18, 2021

What are currency pairs? Forex trading is the act of simultaneously buying one currency and selling another, so the Forex rate will relate to a currency pair. When you buy a bag of apples, you have to exchange some money for it; similarly, when you buy “a bag of foreign currency” you still have to use some money in exchange, the difference is that you are using money to exchange for money. The price of a bag of foreign currency is quoted at the rate of the currency you are trading, also known as the exchange rate.

For example:

The exchange rate of the Euro currency pair against the US dollar is currently 1.3500 $. This means that for 1 Euro you get 1.35 US dollars.

The exchange rate of the Japanese Yen currency pair against the US dollar is 105.00¥. This means that for 1 US dollar, you will get 105 Japanese Yen.

In this case, the euro against the US dollar is a currency pair; and the US dollar against the Japanese Yen is another currency pair.

A currency pair does not necessarily include the US dollar. The Euro against the Yen is also a currency pair; similar to the pound sterling against the yen. Each currency pair will consist of two different currencies. And the rate of the currency pair will depend on which currency is stronger at that time.

Things to know about currency pairs

Things to know about currency pairs

Remember the abbreviations of the coins

To trade Forex, you need to remember the abbreviations of each currency.

They are relatively easy to remember because those are usually the first letters of the country's name in English, for example the word United States Dollar (USD). As a general rule, the first two letters are the country's name and the last letter the name of that currency.

Memorizing these symbols will be very helpful if you are starting to trade cross rates. Exceptions include the South African Rand, which begins with a Z instead of an S (from Dutch it is Zuid-Afrikaanse Rand). You can also sometimes logically deduce an exchange rate abbreviation (like NZD to the New Zealand dollar); but in other cases you just need to search for the symbol (TRY for Turkish lira and KRW for Korean won). And you'd think the Swiss franc would be denoted by SWF, but it's not - its symbol is CHF, CH is the name of Switzerland in Latin, Confoederatio Helvetica.

What currency pairs are most commonly traded?

According to the latest Triennial Central Bank Survey by the Bank for International Settlements conducted in April 2016, the US currency, euro and yen account for the largest share of all spot transactions.

Of the $5.34 trillion traded in the money market every day, $2 trillion is traded in the spot market. And out of that $2 trillion, there's $1.69 trillion in dollar terms, $754 billion in euros, and $612 billion in yen.

This makes Euro/US Dollar (EUR/USD) and US Dollar/Yen (USD/JPY) the most commonly traded currency pairs.

The next two most popular currencies by size traded in the spot market are the British pound at $227 billion daily and the Australian dollar at $196 billion. The British pound/US dollar (GBP/USD) and the Australian dollar/US dollar (AUD/USD) are the next most commonly traded currency pairs.

cap money trading the most in forex

Cross currency pairs

As mentioned in the first lesson, cross rates are currency pairs that do not involve the US dollar.

Euro/Yen (EUR/JPY), British Pound/Yen (GBP/JPY), Euro/Australian Dollar (EUR/AUD), Australian Dollar/Canadian Dollar (AUD/CAD), Korean Won/Yen ( KRW/JPY),… are examples of cross currency pairs.

Because cross rates are not traded very often, rates are often more volatile and have wider bid spreads. Euro/Yen (EUR/JPY) is an exception to this rule, with a market with good depth and liquidity.

Slang words in Forex trading

Knowing a few slang words or special words in the forex market is important. The most typical slang word is “cable”, which is how the British pound (GBP) is called. The word "cable" appeared in 1858, at a time when the New York exchange and the London floor were connected by a cable across the Atlantic Ocean. Back then, the British pound was the top currency for US traders and so to ask for a price in pounds, they would ask for a “cable” price. At the time, exchange rate traders were known as “cable” dealers and to this day those who trade sterling at the bank are still called “cable” dealers.

The New Zealand dollar is called the KIWI, because the KIWI bird is a very famous symbol of New Zealanders; The Canadian dollar coin is called the "Loonie", taken from the image of Canada's national bird on the back of the Canadian one-dollar coin.

When traders ask for a price of “cable” and you must know that this means they are asking for the rate of the British pound/US dollar (GBP/USD). Similarly, the price of “kiwi” or “loonie” also means the price at which someone will buy or sell New Zealand dollars or Canadian dollars against the US dollar.

The Norwegian krone is called the Nocky and the Swedish krone is the Stocky. When a person asks for a Nocky or Stocky rate, you should understand that it is the price at which someone will buy/sell US currency against Norwegian Krone or Swedish Krone. If you wanted to know the euro to Norwegian krone rate, it would be the euro/Nocky currency pair. The Mexican peso will be the Mex and the Hungarian forint will be the Huf.

Forex language is no different from other languages; it has the rules and then the exceptions to the rules. Instead of asking for the EUR/USD rate, a trader would simply ask for a “euro” price. Similarly, the price of the Australian dollar will be the price of the Australian dollar against the US currency.

To complicate matters further, Forex convention quotes most currency pairs in dollars. A trader would ask for dollars when wanting the price of the US currency against the Japanese yen; or dollar rand, when asking the price of the US dollar against the South African rand.

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