The Currency Symbols

All currencies traded on the Forex market have a standard 3-letter code assigned to them. These are the common ones, which are responsible for about 90% of all daily Forex transactions:

USD – US Dollar
EUR – Euro Dollar
JPY – Japanese Yen
GBP – British Pound Sterling
CHF – Swiss Franc
AUD – Australian Dollar
CAD – Canadian Dollar
NZD – New Zealand Dollar

The Currency Pairs

On the Forex market you buy one currency and you pay for it with another currency. Therefore the currencies are always traded in pairs. The pairs are denoted by simply putting the currency codes next to each other, e.g. EURUSD or GBPJPY. Often the pairs are shown separated by a slash (and there is a reason for this – read on!), like this: EUR/USD, GBP/JPY.

Even though you can combine any currency code with any other currency code, the order (which one is first) is predetermined to avoid confusion and is always the same. There is no universal rule of thumb, but usually the more “expensive” currency comes first. Here are the main 6 currency pairs as well as their “nicknames”:

EUR/USD "Euro"
GBP/USD "Cable"
USD/CHF "Swissie"
USD/JPY "Gopher"
USD/CAD "Loonie" or "Beaver"
AUD/USD "Aussie"

These six pairs are called the major pairs or simply “the majors”.

The pairs which do not include USD are called “Crosses”:

GBP/JPY “Pound-Yen” or "Geppy" or “PJ”
GBP/CHF “Pound-Franc”
EUR/JPY “Euro-Yen”
EUR/GBP “Euro-Pound”
EUR/CHF “Euro-Franc”

Now that you know what the pairs look like, let's see what they are used for. Usually the pairs are followed by a quoted price:

EUR/USD = 1.4567

This means that 1 Euro is equal to 1.4567 US Dollars.

If you ever get confused just look at the pair as a simple arithmetic expression. See the slash in the middle? It actually represents exactly that, a division!

“1 EUR divided by 1 USD equals 1.4567”
    or
(1 EUR) / (1 USD) = 1.4567

From here it's easy to see that

1 EUR = 1.4567 USD
    and
1 USD = 0.6865 EUR (because 1 / 1.4567 is 0.6865

Base Currency, Quote Currency, Deposit Currency

The first currency of a currency pair is called the "base currency", and the second currency is called the "quote currency". In this pair, GBP is the base currency and USD is the quote currency: GBP/USD.

The currency in which you opened an account with your Forex broker is called the deposit currency. Typically this will be one of the major currencies, related to the region where you live: USD for US and Canada (if you use a US broker), EUR for most European countries, etc. The deposit currency is important because as soon as you close a trade the profit is converted to the deposit currency. Also, eventually you will want to withdraw some of you profits and that will also be done in the deposit currency.

Pips, Quotes and Lots

As you can see, the currency prices on the FX market are quoted with 4 digits after the decimal point (some brokers even use 5 digits!), which may look weird to you at first. After all, in everyday life we are used to working with 2 digits at most (cents, pennies, etc).

This last (4-th) digit after the decimal point defines the smallest possible move that a currency pair can make. This is called a pip (“Price Interest Point” or “Percentage Interest Point”). For example if the GBP/USD pair moved from 1.9678 to 1.9677 it has just moved by 1 pip down. If it moved from 1.9678 to 1.9698 this would be a 20-pip up-move.

The reason why 4 digits are used in Forex quotes is because a) the Forex transactions involve very large sums (minimum 100,000 units of currency!) and b) because the Forex market is actually very stable and if it weren't for this extra precision one would barely see any movement in the market at all. The EUR/USD pair, for example, which is the most traded pair of all moves by 100 pips a day on average. That's only one cent! If it weren't for the Pips, there would have been days where we would not be able to see any movement in the market at all. The extra precision of the Forex quotes, combined with the large volumes traded creates the intra-day volatility of the FX market which what allows us to make money!

Until the Forex brokers -- and us, the retail Forex traders -- came along, a minimum for a Forex transaction was 100,000 units of currency! This minimum is called a “Lot”.

IMPORTANT: The fact that on the interbank market currencies are traded in chunks of 100,000 DOES NOT mean that you have to come up with $100,000 out of your pocket in order to trade! Read on to learn about mini-lots, micro-lots, margin and leverage. These are tools which allow us to participate with significantly smaller amounts ($500 to $5000).

Mini-Lots and Micro-Lots

Even though brokers usually stick to the 100,000-unit lot size, most brokers who will also allow traders to trade smaller amounts: 10 times or 100 times smaller than the typical lot. These smaller lots are called mini-lots and micro-lots, respectively, and represent trades in increments of 10,000 and 1,000 units of currency.

I know what you're thinking: “Ok... 10,000 or even 1,000 is much better than 100,000 but it's still a lot of money! How can I trade with $500 if the minimum size of a micro-lot trade is 1000 units of foreign currency?”

To understand this we need to look at the mechanics of a Forex trade and get familiar with the concept of margin and leverage, which will be explained in the next issue.

Don't worry if all this sounds a bit confusing and overwhelming at first. It will all sink in in a little while.

If you think that a more hands-off approach to Forex may be more to your liking than you might consider using the services of an account management firm like Forex Automoney or use a fully automated trading software like e.g Forex-Autopilot.