Forex 101: The Semantics of Currency Pairs

Forex market is involved in the trade of one currency to another. The currency exchange, in which the Forex market is involved, is dealt on a global scale. Any of the currencies around the world can be traded in the Forex market. Currency pairs are used to facilitate the exchange of one country's currency to another.

Traders should be confident of the universal currency conversion and the Forex market before they start trading. Let's look at currency pairs and what they mean and how do we understand the information we can gather from such currency pairs.

There are seven major currencies today that currently dominate the Forex market. A huge percentage of Forex transactions that are done everyday involve any of the seven major currencies. These major currencies are the following: the United States Dollar (USD), the Great Britain Pound (GBP), the Euro (EUR), the Canadian Dollar (CAD), the Japanese Yen (JPY), the Swiss Confederation Franc (CHF), and the Australian Dollar (AUD).

In the list we just made above, we have the country's currency alongside its acronym. You'll get used to the acronyms when you're dealing in the Forex market, especially after discussing how the acronyms work. Let's take a closer look at the acronyms of each country and its currency.

Let's take the USD for an example of an acronym used in Forex trade. The first two letters signify the country of origin. In our example US stands for United States. The third letter denotes the currency used in that particular country, in our example the letter "D" stands for Dollar.

Since the Euro isn't really associated with any specific country, in Forex it just takes the acronym EUR. The next question that comes to mind is how come the Swiss Confederation Franc turns out to be CHF? CH is actually a translation from Latin. The Latin from which CH is taken from is Confederatio Helvetica; the "F" of course stands for Franc.

When you deal with currency pairs in the Forex market you'll get to see symbols like GBP/USD. When we exchange one currency for another in Forex trade we often list them in currency pairs like the one we have as an example. We have the names of two currencies listed and separated by a "/" to determine which currency is the base and which one is the counter currency.

When we say GBP/USD, the GBP is the base while the USD is the counter currency in the Forex currency pair. This means that the GBP in this Forex currency pair is the currency that is dominant and often the one that remains constant.

One of the first things every Forex trader should know is how to understand currency pairs and the information associated with them.


Trading in exotic currencies

There are three fundamental risks to consider when investing in exotic currencies: economic development, political stability, and transparency. All these form an estimate as to the currency's strength and reliability.


The Basics of Foreign Exchange

Forex trading can be intellectually challenging and financially rewarding. It is extremely risky, though, and one must understand basics like quotes, forex market drivers and forecasting future quotes. To be able to forecast future quotes, traders use two different methods of analysis, the fundamental and technical analysis.