Currency Pair System in the Forex Market

Currencies are traded in pairs, meaning buying one currency against another or vice versa. The currency pair system is very similar to the old barter system used for trading goods. Since were talking about a system of pairs, this means we have two opposing currencies.

The first currency is called the base currency.
The second currency is called the quote (or counter) currency, and buying/selling is done based on what is known as the exchange rate.

For example:

USD/JPY (US Dollar against Japanese Yen) – the US Dollar is the base currency, and the Japanese Yen is the quote currency.They are traded at an exchange rate determined by the market – let’s assume it’s 110.952.This means that to get 1 US Dollar, you need to pay 110.952 Japanese Yen.

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Currency pairs are divided into three categories:

1. Major Pairs (Majors)

These are the pairs that include the US Dollar and one of the major currencies, such as:

EUR/USD (Euro/US Dollar)
GBP/USD (British Pound/US Dollar)
USD/JPY (US Dollar/Japanese Yen)
USD/CHF (US Dollar/Swiss Franc)

2. Minor Pairs (Minors)

These pairs also include the US Dollar but with less frequently traded currencies. Examples include:

USD/CAD (US Dollar/Canadian Dollar)
AUD/USD (Australian Dollar/US Dollar)
NZD/USD (New Zealand Dollar/US Dollar)

3. Cross Pairs (Crosses)

These are the pairs that do not include the US Dollar. Examples include:

GBP/JPY (British Pound/Japanese Yen)
AUD/CAD (Australian Dollar/Canadian Dollar)
NZD/CHF (New Zealand Dollar/Swiss Franc)

Stay tuned for the next lesson to learn more about the Forex market!