About Currency Pairs and Exchange Rates
When trading currencies, you don’t trade a single currency, but always currency pairs. That’s the reason why when looking at forex quotes you will always see the currencies quoted in pairs, as for example EURUSD, GBPUSD or USDCAD. To every pair you will see an exchange rate quoted. The first currency of the pair is known as the “base” currency, the second one as the “counter” or “quote” currency. The exchange rate gives the amount of the “quote” currency which needs to be sold to buy 1 unit of the base currency.
EURUSD is the rate of 1 euro in US dollars, GBPJPY – 1 British pound in Japanese yens, i.e., the first currency is always defined in terms of the second one. For example in picture below the exchange rate of 1.5736 means that for 1 euro you can get 1.5736 US dollars. You could also write it like 1 euro / 1.5736 US dollar.
Even though there are 100’s of currency pairs out there, you should pay only attention to the major currency pairs, which are the most traded. It is estimated that activity in these currencies comprises more than 85% of the daily foreign exchange volume.
Liquidity is essential when trading foreign currencies. Currencies that are illiquid generally will have wider trading costs (spreads), they also will have a much greater chance to have “fast market” conditions where liquidity can be non-existent and volatility greatly increased, and they are also often more susceptible to short term market manipulation or deception, like false technical breakouts.
The major currency pairs are assumed to be:
EUR/USD = Euro and US dollar
USD/JYP = US dollar and Japanese yen
USD/CHF = US dollar and Swiss franc
GBP/USD = British pound and US dollar
AUD/USD = Australian dollar and US dollar
USD/CAD = US dollar and Canadian dollar
GBP/EUR = British pound and Euro