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About Currencies

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Definition of ‘Currency’

A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, the currency is the basis for trade.

Source: www.investopedia.com

Major currencies in foreign exchange

Forex trading is always done in pairs (currency pairs), were one currency is bought and the other one is sold. These currency pairs make up what is known as the exchange rate. Below you can find the major currencies that are being traded in the Forex market.

Major currency pairs

USD/JPYUS Dollar and the Japanese Yen
EUR/USDEuro and the US Dollar
USD/CHFUS Dollar and the Swiss Franc
GBP/USDBritish Pound and the US Dollar
AUD/USDAustralian Dollar and the US Dollar

Major currencies (Majors)

USDUS Dollar
JPYJapanese Yen
EUREuro
GBPBritish Pound
CADCanadian Dollar
AUDAustralian Dollar
CHFSwiss Frank

About currency pairs

In currency pairs, the first currency is referred to as the base currency and the second one, as the counter currency. The base currency is always equal to 1 monetary unit of exchange.

However, when a currency is quoted against the US Dollar it is identified as direct rate and when a currency is not against the Dollar, it is called cross rate.

The quote currency is converted to a specific number of units of the base currency, which is also referred to as the foreign currency or counter currency.

Bid and Ask price

Currency pairs are quoted with a ‘bid’ and ‘ask’ price. The ‘bid’ price is the price that you are willing to buy a currency and the ‘ask’ price is the price you are willing to sell a currency. Let’s take a currency pair as an example. If the price of the EUR/USD is equivalent 1.2 and you buy that pair, this means that for every 1.2 Euros that you sell, you will get $1. The same counts when you sell a pair.

We advise beginners to select one or two currency pairs to trade in for their portfolio. This is to make things simpler for the beginner and when the trader gained more experience and wishes to add more currency pairs, he/she can do that.

Example

Let’s take as an example the currency pair of EUR/AUD. If it was at the price of 1.40 and this means that for every 1 Euro, you will get 1.40 Australian Dollar. Additionally, currency pairs are traded as 100,000 units of the base currency. Meaning that if you buy EUR/USD at 0.80 you will be paying Dollars for Euros.

 

100,000 x 0.80 = $80,000 for 100,000 Euros

 

Now, if you observe a quote rising, it means that the value of the base currency is getting stronger and if the quote falls, it means that the base currency is becoming weaker.

Domain base currency

Euro

EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD

British Pound

GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD

US Dollar

USD/CAD, USD/JPY, USD/CHF