✅ Lesson 1.4 – Trading Currency Pairs

Understand how currency pairs work and why they are the foundation of Forex trading.

🧭 What Does It Mean to Trade Currencies?

When you trade Forex, you’re not just buying a currency—you’re exchanging one currency for another. Unlike stock trading, where you buy shares of a company, Forex trading involves the simultaneous buying and selling of two currencies.

Example:
When you exchange USD for EUR, you’re selling USD and buying EUR—just like exchanging money at a bank.

🔗 What Are Currency Pairs?

In Forex, currencies are quoted in pairs.
Each pair consists of:

• Base Currency – the first currency listed (what you’re buying)

• Quote Currency – the second currency (what you’re selling)

Example:

• In the pair EUR/USD, EUR is the base currency, and USD is the quote currency.

• If EUR/USD = 1.10, it means 1 Euro = 1.10 US Dollars.

🔄 How Currency Pair Pricing Works

Every Forex transaction involves:

• Bid Price (Buy) → How much quote currency is needed to buy 1 unit of base currency

• Ask Price (Sell) → How much you’ll get in quote currency when selling 1 unit of base currency

If you buy EUR/USD, you’re buying Euros and selling U.S. Dollars.
If you sell EUR/USD, you’re selling Euros and buying U.S. Dollars.

📘 Example for Understanding

Let’s say:

• USD/EUR = 1.50

• Buying this pair means: For every 1.50 Euros, you receive 1 US Dollar

• Selling the pair would mean: For every 1 USD, you get 1.50 Euros

The reverse quote is EUR/USD = 0.667, meaning 1 Euro costs 0.667 USD.

📋 Currency Code Structure

Each currency has a 3-letter symbol:

• First 2 letters: Country (e.g., US = United States)

• Last letter: Currency name (e.g., D = Dollar)

Examples:

• USD = U.S. Dollar

• NZD = New Zealand Dollar

• GBP = British Pound

🌍 Most Actively Traded Currencies

The 8 most commonly traded currencies in the Forex market are:

• USD – U.S. Dollar

• EUR – Euro

• JPY – Japanese Yen

• GBP – British Pound

• AUD – Australian Dollar

• NZD – New Zealand Dollar

• CAD – Canadian Dollar

• CHF – Swiss Franc

From these 8 currencies, we derive about 27 pairs, with 18 being highly liquid and commonly quoted by brokers.

💹 Popular Currency Pairs

🔵 Major Pairs (Involving USD):

• EUR/USD – Euro / U.S. Dollar

• USD/JPY – U.S. Dollar / Japanese Yen

• GBP/USD – British Pound / U.S. Dollar

• USD/CHF – U.S. Dollar / Swiss Franc

🔶 Cross Pairs (No USD involved):

• AUD/NZD – Australian Dollar / New Zealand Dollar

• EUR/AUD – Euro / Australian Dollar

• EUR/CAD – Euro / Canadian Dollar

• GBP/JPY – British Pound / Japanese Yen

🟡 Commodity Pairs:

• XAU/USD – Gold

• XAG/USD – Silver
  These are considered “commodity currencies” as they track physical assets.

💬 Why Currency Pairs Matter

• They reflect relative strength between two economies.

• Understanding how currencies interact is key to predicting price movements.

• Every trade is a reflection of one country’s economic strength versus another’s.

🧠 Key Takeaways

• Currency pairs are the core unit of Forex trading.

• You’re always buying one currency and selling another.

• The most liquid pairs offer tight spreads and fast execution.

• Knowing how pairs are structured and priced helps you trade smarter.

📘 In the next lesson, we’ll dive deeper into how economic indicators influence currency prices.