Understanding Currency Pairs

1. Currency Pairs:

   • Major Currency Pairs:

     • These pairs involve the most widely traded currencies and account for a significant portion of daily forex volume.

     • Examples include:

       • EUR/USD (Euro/US Dollar)

       • USD/JPY (US Dollar/Japanese Yen)

       • GBP/USD (British Pound/US Dollar)

     • Major pairs tend to have high liquidity and tight spreads.

   • Minor Currency Pairs (also known as Cross Currency Pairs):

     • These pairs do not include the US dollar.

     • Examples include:

       • EUR/GBP (Euro/British Pound)

       • AUD/JPY (Australian Dollar/Japanese Yen)

       • NZD/CAD (New Zealand Dollar/Canadian Dollar)

     • Minor pairs may have wider spreads but still offer trading opportunities.

   • Exotic Currency Pairs:

     • These pairs involve one major currency and one currency from an emerging or smaller economy.

     • Examples include:

       • USD/TRY (US Dollar/Turkish Lira)

       • EUR/TRY (Euro/Turkish Lira)

       • USD/SGD (US Dollar/Singapore Dollar)

     • Exotic pairs have lower liquidity and wider spreads, making them riskier.

     • Traders often use them for speculative purposes.

2. Reading Forex Quotes:

   • A forex quote consists of two prices: the bid price (the price at which you can sell) and the ask price (the price at which you can buy).

   • The quote shows the exchange rate between the base currency and the quote currency.

   • For example:

     • EUR/USD: Bid = 1.1234, Ask = 1.1235

       • You can buy 1 Euro for 1.1235 US dollars (ask price).

       • You can sell 1 Euro for 1.1234 US dollars (bid price).

3. Calculating Pip Values:

   • A pip is the smallest price movement in a currency pair.

   • Most pairs are quoted to four decimal places (except for JPY pairs, which are quoted to two decimal places).

   • To calculate pip value:

     • For non-JPY pairs:

       • Pip value = (1 pip / exchange rate) * position size

       • Example: If you're trading EUR/USD and the exchange rate moves by 1 pip (0.0001), the pip value for a standard lot (100,000 units) would be:

         • Pip value = (0.0001 / 1.1235) * 100,000 = $8.89 (approximately)

     • For JPY pairs:

       • Pip value = (1 pip / exchange rate) * position size * 100

       • Example: If you're trading USD/JPY and the exchange rate moves by 1 pip (0.01), the pip value for a standard lot would be:

         • Pip value = (0.01 / 110.50) * 100,000 = 90.47 JPY (approximately) Remember, understanding currency pairs and forex quotes is fundamental to successful trading. Practice reading quotes and calculating pip values to enhance your skills.