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Forex Trading Pairs, the What & Why
In financial markets, every transaction comes in twos; in standard trading, the duet is invoked when one entity tries to sell, and one entity tries to buy. Both sides must exist at the same time to have even a chance of being successful.
The Foreign Exchange or Forex market, however, multiplies that concept with another pairing, and that additional facet is crucial. Not only is currency bought and sold, the trades are always in relation to another set: The actual currency pairs value rating against each other. One cannot trade one currency without its value pair partner.
For example, one Forex pairing might comprise the US dollar or USD against the Australian dollar or AUD. The pairing in that Forex trade would read: USD/AUD. The USD/AUD trade exchanges may incorporate vastly different base values for the AUD from a Japanese/Australian exchange (JPY/AUD) rates, because the Australian dollar values differently against the Japanese Yen than it does against the US dollar. By extension, the JPY/USD exchange rate may incorporate different Yen and dollar values that differ from the AUD-related rates, based on the pairing values of that exact currency set.
To demonstrate, on 31 January 2011:
The AUD/USD pair reflect a very slightly stronger USD than the AUD. The Yen comparison shows the Yen is slightly stronger against the AUD than it is against the USD, taking fewer Yen to purchase something than it would using the AUD.
For reference, reversing the pairings, the USD/AUD rate was 1USD to 1.00683 AUD or 1:1.00683, with the front currency always listed first as the base currency. The JPY/AUD rate was 1:0.01227, and the JPY/USD rate was 1:0.01219.
Usual Currency Pairs
While the total number of currency pairs possible is limited only by the finite number of currencies on the planet, some currencies are traded more often than others. The top eight include:
Within only those eight currencies, there are 27 pairings possible.
Most Common Forex Trades
Of the 27 potential Forex pairings above, 8 pairs are most actively traded:
Additional Influences and Differences
The open market conversion rate is how much of one currency is worth in relation to another currency. Forex trading involves the same concept, but it also incorporates bids, stop calls, market fluctuations and more, just as the traditional trading of stocks, bonds and Treasury bills.
Currency trading reflects relative value of currencies against others. Always noted in pairs, rated values for the AUD differ against one currency to another when the pairing changes, although the actual value of the domestic AUD remains the same during the same time period. JPY may gain slightly in an hour, but the AUD still buys the same amount of vegemite during that period.
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