Understanding Currency Pairs

The Majors

Most currency transactions involve the "Majors", consisting of the British Pound (GBP), Euro (EUR), Japanese Yen (JPY), Swiss Franc (CHF) and the US Dollar (USD). Many traders add the Canadian Dollar (CAD) and the Australian Dollar (AUD) to this category as well.

( view figure 1 )

Currencies in Pairs

New traders often struggle to grasp the concept of trading currencies in pairs. "Why not just buy the Euro?" they might ask. "Why does it have to be paired with the US Dollar?" The currency on the right side of the pair is there to establish a comparative value, without it we would be unable to assign a value to the base currency (currency on the left side of the pair). If the currencies were not paired, we would be unable to determine what a single currency would gain or lose value against. By pairing two currencies against each other a fluctuating value can be established for the one versus the other.

( view figure 2 )

Cross Currency Pairs

Currency pairs that do not include the US dollar are commonly referred to as Cross Currency Pairs. Cross Currency trading can open a completely new aspect of the Forex market to speculators. Some cross currencies move very slowly and trend very well. Other cross currency pairs move very quickly and are extremely volatile; with daily average movements exceeding 100 pips.

Many of these cross currencies have a higher swap value. Swap is a credit or debit as a result of daily interest rates. When traders hold positions over night, they are either credited or debited interest based on the rates at the time. Often, cross currencies yield higher interest rates than major currencies.

Images: