Currency Pairs are what stocks are to stock traders with one important difference. Unlike stocks, a currency does not have a fixed price. We can quote the price of the U.S. dollar by referencing the Euro, the British Pound, the Yen, or even gold or silver, while the price of an American company can only be quoted in the currency of the exchange where it is traded.
The most popular and common currency pairs are the EURUSD, EURJPY, USDJPY, AUDJPY, AUDUSD, USDCHF, EURCHF, EURGBP, USDGBP, and GBPJPY pairs. The small list below shows the abbreviations used for different currencies in the market:
AUD: Australian Dollar “Aussie”
CHF: Swiss Franc “Swissie”
CNY: Chinese Yuan
EUR: the Euro “the single currency”
GBP: The British Pound
JPY: Japanese Yen
USD: U.S. Dollar “Greenback
We can, of course, say that we “buy Yen”, for example, without concerning ourselves with what we use to buy it. But even then we make the implicit assumption that we’ll sell something to finance our purchase. This is even more the case with traders since they tend to have no money of their own, in the sense that most of the funds used by them are American dollars borrowed from the broker. In order to purchase any currency forex traders need to finance the transaction with a sale.
When we buy the Euro by selling the dollar (for instance, as tourists), we are in fact creating a currency quote. If we sell 150 USD to buy 100 Euros from a bank, for example, the quote that we accept is 1,5 for the EURUSD.
The most important result of this discussion is that there are two ways to see a transaction in forex. When you buy 1 lot of the EURUSD pair, you might say that you buy 1 lot of EUR, or that you sell one lot of USD, or both Thus, a currency transaction can always be used to express separate but related ideas about different currencies at the same time.
In short, you can be bullish about a currency, but in order to know how to profit, you need to know when to be bearish as well. There are no bulls or bears in forex, in fact, since any currency’s bull is another one’s bear by definition.
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