Concept of “currency pair”
For a better understanding of what a position is, the concept of a currency pair was introduced on the Forex market. Instead of saying, “I bought euro for dollars” or “I sold euro for dollars”, traders use shorter expressions: “To buy euro-dollar” or “To sell euro-dollar” (respectively). Let’s learn more about a currency pair.
Currency pair record is abbreviations (in accordance with ISO 4217 standards) of the respective currencies in a succession (without spaces but sometimes written with the right slash “/”). For example, the euro (EUR) and the US dollar (USD) together make up a currency pair EURUSD (euro-dollar). Purchase of this currency pair means buying euros for dollars. And always, in any case, whatever the currency is included in the pair, the first currency in the pair is bought for the second. Therefore, purchase of AUDCAD means buying Australian dollars for Canadian dollars. Similarly, selling of EURUSD means selling euros for dollars.
It is more professional to say that the first currency in the pair is base and the second one is quote. Therefore, in a pair NZDUSD the base currency is the New Zealand Dollar (NZD), and the quote currency is the US dollar (USD).
When viewing the list of currency pairs (for example, in the window “Market Watch” in the client terminal MetaTrader 4 of the LiteForex Company), we can notice that there are financial instruments in which the base currency is the US dollar (for example, USDJPY, USDCHF, USDCAD). This is the case of a direct quote (it shows the quantity of quote currency units in one US dollar). At the same time, the US dollar is included in other currency pairs as the quote currency (for example, EURUSD, GBPUSD, AUDUSD, NZDUSD). This is called a reverse quote. The value of the price in this case should be interpreted as the quantity of dollars per one base currency.
Of course, by simple mathematical transformation we can easily obtain USDEUR from EURUSD. Indeed, suppose that the price of EURUSD at some point is 1.39224, then:
— This would be the price of UDSEUR.
But why quote lists of the largest brokerage companies do not have such a financial instrument? – It is just a historical tradition.
The listed above pairs: USDJPY, USDCHF, USDCAD, EURUSD, GBPUSD, AUDUSD, NZDUSD constitute a group of so-called “Majors” – they are united by the fact that one of the currencies in the pair is always the US dollar. This is the most highly liquid financial instruments that have a significant volatility and capacity to fluctuate substantially and, therefore, they carry a nearly inexhaustible potential for profit.
There are also other groups of instruments. If, for example, the base currency is the Australian dollar, and the quote currency is the Canadian dollar, this is AUDCAD cross-rate. The so-called cross-rates are divided into “major crosses” and “minor crosses” according to their liquidity in the financial markets.
Besides the fact that there are various groups of financial instruments, we can mention that some currencies can often play one or another typical role. In particular, the currencies of the most stable countries, as well as contracts for precious metals (USDCHF, USDJPY, XAUUSD, XAGUSD) can play the role of financial instruments, investments in which can help you safely ride out times of crisis on the markets. In trader’s jargon, such instruments are called “safe haven” (ref. “safe haven”). The currencies of those countries in whose export system raw materials prevail are often called commodity currencies (e.g.: USDCAD, AUDUSD).
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