If you look at the quotation structure of Forex currency market, you will see something like USD/EUR or GBP/USD. These are the Forex currency pairs.
All Forex trades that involve buying of one currency and selling of another, are done in Forex currency pairs. E.g. you buy Euros with US Dollars anticipating that the price of Euro will increase in value relative to the US Dollar. So, when the Euro rises relative to Dollar, you sell it and make profits.
Common trading pairs
The Forex currency pair is a single unit, an instrument that is bought or sold in the forex market. Though there are many currency pairs available in a Forex trading system the most commonly traded Forex currency pairs are:
EUR/USD – Euro vs. U.S. Dollar
GBP/USD: British Pound vs. U.S. Dollar
USD/JPY: U.S. Dollar vs. Japanese YEN
USD/CHF: U.S. Dollar vs. Swiss franc
In the Forex currency pairs, the value of one currency is determined by its comparison to another currency. When the Forex currency pairs are quoted, the first currency is referred as base currency and the second currency is called counter or quote currency. The base currency is always equal to 1 monetary unit of exchange (e.g. 1 EUR, 1 GBP, 1 USD). The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.
Buying and selling
The Forex currency pairs are usually traded and quoted with a "bid" and "ask" price. The bid is the price at which the broker is willing to buy and the ask is the price at which he is willing to sell.
For example, if the USD/EUR currency pair is quoted as - USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 euros that you sell, you get US$1. If you sold the currency pair, you receive 1.5 euros for every US$1 you sell.
This is the first currency quoted in a Forex currency pair. It is also known as domestic urrency or accounting currency and sometimes referred to as the primary currency of a Forex currency pair. For example, CAD/USD currency pair. Here the Canadian dollar is te base currency while the U.S. dollar is the quote currency.
The price represents how much of the quote currency is needed to get one unit of the base currency.
Major base currencies:
Euro - EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD
British Pound - GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD=
US Dollar - USD/CAD, USD/JPY, USD/CHF
This is the second currency quoted in a Forex currency pair. This is also referred to as the
foreign currency, secondary currency or counter currency.
Major quote currencies:
U.S. dollar, British pound, Euro, Japanese yen, Swiss franc or Canadian dollar.