Sunday, 27 September 2009

Currency Pairs: Introduction What is currency pairs?

Currency Pairs: Introduction

What is currency pairs?

Foreign exchange is the trading of different currencies existing in the world. It is the world’s least regulated and largest market which provides maximum liquidity to the investors. Trading in the Forex market is always carried out in the form of pairs known as Currency Pairs. In this, a trader buys one currency and sells the other one. Together, these two currencies make up the ‘exchange rate’.

For example, one may choose to buy Euros in exchange for Dollars with a view that the value of Euros would increase at a higher rate in comparison to Dollar. So if the value of Euro does rise, one can earn the position and thus earn profit. Some of the most widely traded currencies in the world Forex market include:

? US Dollar (USD)
? Euro (EUR)
? British Pound (GBP)
? Japanese Yen (JPY)
? Swiss Franc (CHF)
? Australian Dollar (AUD)
? Canadian Dollar (CAD)

Most popular and frequently traded currency pairs include

? U.S. Dollar and Japanese Yen (USD / JPY)
? Euro and U.S. Dollar (EUR / USD)
? British Pound and U.S. Dollar (GBP / USD)
? U.S. Dollar and Swiss franc (USD / CHF)

In any currency pair, the first currency of the pair is known as base currency whereas the second currency is known as the quote currency or counter currency. The value of the base currency is always taken as 1 that is 1 Pounds, 1 Dollar or 1 Euro.

Trading Currency Pairs for Gaining Maximum Profit

Accounting currency or domestic currency refers to the primary currency of any currency pair. Its price signifies the amount of the quote currency that is required for obtaining one unit of base currency. The rate of currency quote against U.S. Dollars is called direct rate. On the contrary, currencies which are not traded against U.S. Dollars, they are known as cross rate.

When being traded, the quote currency is converted into the appropriate amounts of base currency. For instance, if suppose you observe the quote of USD / JPY to be 1.20, it means that for 1 unit of U.S. Dollar, you will get 1.20 Units of Japanese Yen. Usually, the currency pairs are traded at 100,000 units of base currency. For instance, to buy EUR / USD at 0.96, one will have to pay 96,000 Dollars to get 100,000 Euros.

When the quote goes up, it signifies that value of base currency is increasing or becoming stronger. However, when the quote goes down, it signifies weakening of base currency. The ‘bid and ask price’ is the basis for trade of currency pairs. Bid price is the rate at which one wants to buy whereas the ask price is the rate at which one wants to sell.

The secret behind successful trading is selection of one or two currency pairs for trading when one is a beginner. Once you get the hang of it, you can add more pairs in your portfolio for trading. But when one is new, it is advisable to stick to limited pairs to ensure simplicity.