Suppose you’re new to the Forex market. In that case, it can be a little confusing, especially with the two sets of letters and the numbers using a ton of decimal places. For example, the EUR-USD pair is trading at 1.0649. What is a pair? What is 1.0649 representing? What does EUR stand for or USD? We’re going to answer those questions in this article.
How to Read Currency Pairs
First things first: we call the instruments we trade in Forex pairs because we’re always trading two currencies against each other. For example, the EUR-USD pair is the Euro vs. the United States Dollar. One is called the Base, and the other is the Quote.
- Base Currency: This is the first currency in the pair, the currency being bought or sold. In the case of the EUR-USD, the EUR is the base currency.
- Quote Currency: this is the second currency, indicating the amount needed to exchange for one unit of the base currency. For the EUR-USD pair, the USD is the quote currency.
That brings us to what the pair’s number/value represents. Using the EUR-USD, let’s pretend it’s trading at 1.0659.
- Example with EUR-USD:
- Base Currency: EUR (Euro)
- Quote Currency: USD (U.S. Dollar)
- Reading the Pair: If the price of EUR-USD is 1.0659, it means 1 Euro is equivalent to 1.0659 U.S. dollars.
- Interpreting Changes: If the Euro strengthens against the Dollar, the price of EUR-USD will increase, indicating that more dollars are required to buy one Euro.
- Buying or going long the EUR-USD means you think the Euro will outperform the Dollar.
- Selling or going short the EUR-USD means you think the Euro will underperform the Dollar.
Types of Currency Pairs
Forex currency pairs are classified into three types, each offering unique trading opportunities:
- Major Pairs: These involve the U.S. dollar paired with other major currencies. Examples include EUR-USD, USD-JPY, and GBP-USD, which are noted for their liquidity and frequent trade.
- Minor Pairs (Crosses): These do not include the U.S. dollar, such as EUR-GBP and AUD-NZD, and usually feature moderate liquidity.
- Exotic Pairs: A major currency paired with a currency from an emerging economy, like USD-PLN (Polish zloty), characterized by less liquidity and higher volatility.
And there you have it! A quick rundown of how to read and interpret Forex pairs!
