Currencies are traded in ‘pairs’, for example, if an investor was carrying out a pound to US dollar trade, they would be buying US dollars and selling pounds.
Each currency has a three-letter code, for example, British pound (GBP), US dollar (USD), euro (EUR) and Japanese Yen (JPY).
Although there are more than 180 different currencies across the world, forex brokers do not offer the option to trade in all of these.
The traditional ‘four majors’ are EUR/USD, USD/JPY, GBP/USD and USD/CHF, with the other ‘majors’ being AUD/USD, USD/CAD and NZD/USD. The most-traded pair is the EUR/USD followed by USD/JPY and GBP/USD.
‘Minor’ pairs relate to other combinations of the larger currencies, such as GBP/EUR, while ‘exotics’ include emerging market currencies.
The first currency in the pair is the ‘base’ currency and is always set to 1. The second is the ‘quote’ currency. For example, GBP/USD of 1.23 means that £1 is worth $1.23.
As with shares, the ‘ask’ price is the price to buy the currency and the ‘bid’ is the price investors would receive if they’re selling the currency.
