Understanding Currency Pairs and Quotes
In Forex trading, currencies are traded in pairs, with each pair representing the exchange rate between two currencies. Understanding currency pairs and quotes is crucial for making informed trading decisions.
Major and Minor Currency Pairs:
- Major pairs: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD
- Minor pairs: EUR/GBP, EUR/JPY, GBP/JPY, etc.
- Exotic pairs: USD/TRY, USD/ZAR, etc. (less liquid and more volatile)
How to Read Forex Quotes:
- EUR/USD = 1.1000 (1 Euro = 1.1000 US Dollars)
- Quote conventions:
- Base currency (EUR) / Quote currency (USD)
- Bid price (buy) and Ask price (sell)
- Pip value: smallest price change (0.0001 in most pairs)
Quote Types:
- Direct quote: domestic currency per unit of foreign currency
- Indirect quote: foreign currency per unit of domestic currency
- Cross-currency quote: currency pair not involving the domestic currency
Reading Quote Screens:
- Understand the layout and terminology
- Identify bid and ask prices, spreads, and pip values
- Use quote screens to monitor market movements and trends
Currency Pair Correlations:
- Positive correlation: pairs move together (e.g., EUR/USD and GBP/USD)
- Negative correlation: pairs move opposite (e.g., EUR/USD and USD/CHF)
- Understanding correlations helps with risk management and diversification
By grasping currency pairs and quotes, you'll be able to navigate the Forex market with confidence. In the next post, we'll explore technical analysis in Forex trading.