This is a brief primer designed to help those new to trading FX to understand some points in relation to the currency pairings.
A currency pair is the quoting of the relative value of one currency unit against a unit of another currency. The currency that is used as the reference is called the counter or quote currency and the currency that is quoted in relation is called the base or transaction currency.
The quotation EURUSD 1.3985 means that one euro is exchanged for 1.3985 US dollars.
To illustrate, using the common pair EURUSD, EUR is the base currency and the USD is the counter currency.
The rules for formulating standard currency pair notations result from accepted priorities attributed to each currency.
From its inception in 1999 and as stipulated by the European Central Bank, the euro has first precedence as a base currency. Therefore, all currency pairs involving it should use it as their base, listed first. For example, the US dollar and Euro exchange rate is identified as EURUSD.
Although there is no standards setting body or ruling organization, the established priority ranking of the major currencies is:
- Euro (EUR)
- British pound sterling (GBP) (aka Cable)
- Australian dollar (AUD) (aka Aussie)
- New Zealand dollar (NZD) (aka Kiwi)
- United States dollar (USD)
- Canadian dollar (CAD) (aka Loonie)
- Swiss franc (CHF) (aka Swissie)
- Japanese Yen (JPY)
So, the Canadian Dollar would appear USDCAD as the US Dollar received a higher priority than the Canadian Dollar and as such it will be the base currency.
From this list of major currencies the most liquid currency pairs in the world, known as the majors, represent 85% of the FX market and are: EURUSD, USDJPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD. The NZD/USD pairing is sometimes considered to be a major.
It is typical that for a major pairing the USD symbol is not included. So, if you see someone refer to a currency pair as the EUR or AUD it is a pairing of the Euro or Australian Dollar against the US Dollar.
For a currency pair that does not include the US Dollar, this is referred to as a cross pair. For example, the EURCHF is a quote showing the Euro versus the Swiss Franc.
Currencies are typically traded in 'lots', typically 100,000 units of the base currency. it is also possible to trade mini-lots which are 10,000 units of the base currency.
The profit or loss for any trade is calculated based upon the price difference from entry to exit, measured in pips. A pip is the smallest* change in price seen in a currency.
It is important to note that pips are not equal in value and that you understand that for each currency pairing the pip value.
For currency pairs that use the USD as the quote currency (EURUSD, GBPUSD, NZDUSD etc) each pip is worth $10 per $100,000 lot.
This applies ONLY to pairs where the USD is NOT the base.
When the USD is the quote pair (CADUSD, CHFUSD, JPYUSD etc) or if you are trading a cross (a cross is a currency pair where NEITHER currency is the US Dollar) such as the EURCHF or GBPJPY then the calculation becomes a little more involved.
* Note that certain brokers offer/display fractional pip changes. For example, the EUR pip is .0001 (i.e. 1.3901 to 1.3902 is a 1 pip move) although some platforms might show an additional digit, such as 1.39013.