Foreign Exchange (or Forex) trading has grown in popularity in the last ten years. There are new traders entering the market every day, and the daily trading volume in this financial market is ever-increasing.
Unlike most other financial trading markets, currencies are not traded on their own, but rather in pairs. The trading of currency pairs have unfortunately confused many would-be traders and have discouraged them from learning more about currency trading.
What Is A Currency Pair?
Whenever we purchase a product, we pay money for it. This is also what happens in the stock and futures trading markets: we trade our money in exchange for a stock or for a futures contract. It's not a difficult concept to grasp, right?
Now, in the currency market, things will get a little more complicated. You see this time, instead of trading money for goods you are trading money for money. So for example, if I wish to purchase 1 Euro, I would have to pay a certain amount of U.S. Dollars for it. If I wish to purchase 1 Pound, I also would have to pay a certain amount of U.S. Dollars for it.
For example, one stock of company A may cost US$20, so we have:
1 stock of ABC company = $20
In the same manner, one Euro may cost US$1.50:
1 Euro = 1.50 USD
This is known as a currency trading rate. For purposes of simplicity, this rate is often quoted as:
EUR/USD = 1.5000
This is essentially how most currency trading rates are expressed. The Euro is the Base Currency, as it is the currency that the U.S. Dollar is quoted against.
For the USD/JPY currency pair, the U.S. Dollar is the Base Currency. For the GBP/USD pair, the Base Currency is the Pound.
And that's all there is to it. It's easy to understand Currency trading rates when you know how, isn't it?
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