If you look at the quotation structure of the Forex currency market, you will see something like USD/EUR or GBP/USD. These are the Forex currency pairs.
All Forex trades that involve buying of one currency and selling of another, are done in Forex currency pairs. For example, you buy Euros with US Dollars anticipating that the price of Euro will increase in value relative to the US Dollar. So, when the Euro rises relative to Dollar, you sell it and make profits.
The Forex currency pair is a single unit, an instrument that is bought or sold in the Forex market. Though there are many currency pairs available in a Forex trading system the most commonly traded Forex currency pairs are:
EUR/USD – Euro vs. U.S. Dollar
GBP/USD: British Pound vs. U.S. Dollar
USD/JPY: U.S. Dollar vs. Japanese YEN
USD/CHF: U.S. Dollar vs. Swiss franc
In Forex currency pairs, the value of one currency is determined by its comparison to another currency. When the Forex currency pairs are quoted, the first currency is referred to as the base currency and the second currency is called the counter or quote currency. The base currency is always equal to 1 monetary unit of exchange (e.g. 1 EUR, 1 GBP, 1 USD). The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.
The Forex currency pairs are usually traded and quoted with a ‘bid’ and ‘ask’ price. The ‘bid’ is the price at which the broker is willing to buy and the ‘ask’ is the price at which he is willing to sell.
For example, if the USD/EUR currency pair is quoted as - USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you get US$1. If you sold the currency pair, you receive 1.5 euros for every US$1 you sell.
Base Currency
This is the first currency quoted in a Forex currency pair. It is also known as domestic currency or accounting currency and sometimes referred to as the primary currency of a Forex currency pair. For example, CAD/USD is a currency pair. Here the Canadian dollar is the base currency while the U.S. dollar is the quote currency. The price represents how much of the quote currency is needed to get one unit of the base currency.
Major base currencies:
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
Quote Currency
This is the second currency quoted in a Forex currency pair. This is also referred to as the foreign currency, secondary currency or counter currency.
Major quote currencies:
U.S. dollar
British pound
Euro
Japanese yen
Swiss franc
Canadian dollar
The key to successful trading is selecting one or two pairs of currencies that you wish to trade in. Sure, once you are a seasoned expert you may wish to trade in more pairs but the beginner is advised to stick to just one or two for simplicity.
Paul Bryan is a successful and experienced Forex trader and also the webmaster for http://www.investawise.com, bringing you all the latest Forex news, reviews and advice.
Article Source: http://EzineArticles.com/?expert=Paul_Bryan
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