Before starting to trade currencies, an investor has to understand the basic terminology of the FX market, including how to interpret quotes or exchange rates. In every foreign exchange transaction an investor is simultaneously buying one currency and selling another. These two currencies make up what is known as a "currency pair." All currencies trade in pairs.
Currency Symbols or ISO Codes
Each currency pair is made up of two 3-letter symbols. The symbol for each currency is also known as an ISO Code (or officially as "ISO 4217 Code"). ISO 4217 codes are published by the International Organization for Standardization; for example, the ISO code for the Japanese Yen is JPY.
This is an example of the quote of the US Dollar versus the Japanese Yen:
USD/JPY = 85.32
The currency to the left of the slash ("/") is called the Base Currency (in this example, the US dollar is the base) and the one on the right is called the Quote Currency or Counter Currency (in this example, the Japanese Yen). This notation means that (going from left to right) 1 unit of the base currency (that is, 1 dollar) is equal to 85.32 Japanese Yen. If buying, the exchange rate specifies how much you have to pay in units of the quote currency to buy one unit of the base currency; in the above example, you have to pay 85.32 yen to buy 1 US dollar. If selling, the exchange rate specifies how much units of the quote currency you can get for selling one unit of the base currency; in the above example, you will receive 85.32 Yen when you sell 1 Dollar.
As with stocks, a price quote in FX includes a Bid Price (or Bid) and an Ask Price (or Ask). This can be easily illustrated with an example of a quote taken from the trading software:
In the above example, the bid price for USDJPY (notice that in this particular platform the slash "/" is excluded) is 83.44 yen and the ask price is 83.46. The bid price is the price at which dealers are willing to buy the base currency (in units of the quote currency) and users of our MT4 platform can sell. Thus, if a trader wants to "Sell USD," he/she would sell dollars at 83.44 yen. The Ask price, on the other hand, is the price at which dealers are willing to sell the base currency and users of our system could buy it. If a trader wants to "Buy USD," he would be buying dollars at 83.46 yen.
Even though there are many currencies all over the world, over 80% of all daily transactions involve the trading of a group of currencies known as the "Majors." These currencies include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.
Most Actively Traded Currency Pairs
The currency pairs that generate the most trading volume in the FX market are provided below, along with their corresponding symbols and common nicknames (accepted jargon used among professional traders).
- Euro / US Dollar (EUR/USD) – Nickname: "Euro" or "Fiber"
- US Dollar / Japanese Yen (USD/JPY) – Nickname: "Yen" or "Ninja"
- British Pound / US Dollar (GBP/USD) – Nickname "Cable"
- US Dollar / Swiss Franc (USD/CHF) – Nickname: "Swissy"
- US Dollar / Canadian Dollar (USD/CAD) – Nickname: "Loonie," "The Funds," and "Beaver"
- Australian Dollar / US Dollar (AUD/USD) – Nickname: "Aussie," "Ozzie," and "Matie"
In general, the best option is to stick with the most commonly traded (and therefore most liquid) currencies; i.e., the "Majors" (even though many traders also work with the "Crosses" or non-USD-based pairs, such as EURJPY, EURGBP, etc.).
The examples below were taken from the MT4 trading platform, which provides real time, streaming quotes. From top to bottom are the euro-dollar exchange rate, the dollar-yen exchange rate, the british pound-dollar exchange rate, the dollar-swiss franc rate, etc. The first six quotes are of major pairs.
Taking the example of the EURUSD quote above, buying one euro would cost 1.3582 US dollars and selling would provide 1.3580 USD.
If you want to see more live quote examples, you can sign up for a free 60-day test drive of our trading software by clicking here. You will be able to obtain live prices as well as place simulated trades in real time using different currency pairs and other non-currency instruments (suck as stock indexes, oil, gold, stocks, and more).