Although we can make transactions on stocks, commodities and stock market indices with difference contracts known as CFDs in the Forex market for short, we generally make transactions on currency pairs in this market. By the way, currency pairs are also called par Dec.
There are various currency pairs that can be traded on the Forex market, but the vast majority of traders stick to a group of about 8 to 10 pairs. First, we have what are expressed as major currency pairs that we can choose for transactions. These are by far the most Decently traded currency pairs, and many processors use one or two of them quite often. The major currency pairs are:
EUR/USD (Euro/US Dollar)
USD/JPY (US Dollar/Japanese Yen)
GBP/USD (British Pound Sterling/US Dollar)
USD/CHF (US Dollar/Swiss Franc)
It is necessary to know how they all act against the American dollar and pay special attention to it. Therefore, when traders discuss these parities on social media networks, they only mention them as Euros, Yen, Pounds and Swissy.
Then we have what we call second-tier currency pairs, and these parities that you need to know include the following:
AUD/USD (Australian Dollar/US Dollar)
USD/CAD (US Dollar/Canadian Dollar)
NZD/USD (New Zealand Dollar/US Dollar)
Again, all of these pairs are against the US dollar, so simply the abbreviations Aussie for the Australian dollar, Loonie for the Canadian dollar, and Kiwi for the New Zealand dollar are also used.
Then there are also cross currency pairs, and these include non-US dollar pairs. Some of the most popular cross currency pairs are:
EUR/JPY (Euro/Japanese Yen)
GBP/JPY (British Pound Sterling / Japanese Yen)
EUR/GBP (Euro/British Pound Sterling)
There are also exotic currency pairs, among which the Turkish lira (TRY) is also Dec. Exotic currency pairs representing the currencies of developing countries contain the currency of the country being traded and contain the American dollar, but they are not included in the major or second-Dec parities.
What Does It Mean for Currency Pairs to Trade Together?
When you look at currency pairs, the first currency you see is called the base currency. The second currency is called the opposing currency. For example, if we consider the CAD/USD pair, here CAD (Canadian Dollar) is the base currency, USD (American Dollar) is the opposite currency.
For a better understanding, let’s say you are on a trip to Canada. While watching the local news of the country on television, you came across a news story like this: “The Canadian dollar fell against the dollar today and reached a low of 71 cents.”
Basically what they are trying to explain in this news is that the value of the Canadian dollar compared to the US dollar has decreased and one Canadian dollar is equal to 0.71 US dollars. Since the US dollar is the most important currency in the world, you can see that this currency is compared to our local currency, the Turkish lira, and even the Euro or the British Pound, or some other major currencies.
For CAD/USD, you can see something like this: 0.7125 / 0.7128
Looking at 0.7125 here, this shows how much it takes to buy a US dollar of the Canadian dollar, which is the base currency. In this case, the US dollar is the opposite currency, and the Canadian dollar is the base currency, so US $ 0.7125 is equal to 1.00 Canadian dollars. So if you leave Canada and move to the United States, each Canadian dollar in your pocket will be worth about 71 cents.
What Do the Figures on Forex Parities Mean?
It is important that you understand what the numbers in Forex parities mean. So let’s immediately proceed to tell from the example of the same parity. If CAD/USD was quoted at 0.7125/0.7128, what exactly would it mean? According to this example:
If we thought that the value of the Canadian dollar would increase relative to the US dollar and wanted to buy the Canadian dollar, in this case we would have to pay the SALE price, which is 0.7128. On the other hand, if we thought that the Canadian dollar was weakening against the US dollar and wanted to sell it, we would have sold it at a PURCHASE price of 0.7125.
Now, if we had made the decision to buy the Canadian dollar at 0.7128 and close our position immediately without giving the price a chance to move, we would have had to close our position by selling the Canadian dollar at 0.7125.
In this example, there would be a price difference of 0.0003, which we also refer to as a spread or scissors, and this would be the amount we lost in the transaction. In the case of the Canadian dollar, every 0.0001 move is called a pip (Price Interest Point). So we would have lost 3 pips (or 3 points) in this process.