Lesson 4.2: Currency Pairs and Quotes
Forex trading revolves around currency pairs, where one currency is exchanged for another. In this lesson, we’ll decode how currency pairs are represented, what pips and spreads mean, and engage you with a quiz to match currency pairs to their countries.
- Decoding Currency Symbols
- How Currency Pairs Work:
- Each pair consists of a base currency (first) and a quote currency (second).
- Example: In EUR/USD, EUR (euro) is the base currency, and USD (US dollar) is the quote currency.
- Major Currency Pairs:
- EUR/USD, GBP/USD, USD/JPY, and AUD/USD are considered majors due to their liquidity.
- Pro Tip: Focus on major pairs as a beginner, as they offer lower spreads and higher liquidity.
- Understanding Pips and Spreads
- What is a Pip?
- Definition: A pip (percentage in point) is the smallest price movement in a forex pair, typically 0.0001 for most pairs.
- Example: If EUR/USD moves from 1.1000 to 1.1001, it’s a 1-pip change.
- What is a Spread?
- Definition: The difference between the bid (sell) and ask (buy) prices of a currency pair.
- Why It Matters: Spreads represent transaction costs for traders.
- Example: If EUR/USD has a bid price of 1.1000 and an ask price of 1.1002, the spread is 2 pips.
- [Interactive Quiz]: Match the Currency Pairs to Their Countries
- Instructions:
- Match the currency pairs below with the correct countries.
- Quiz:
- USD/JPY: ______
- GBP/USD: ______
- EUR/USD: ______
- AUD/USD: ______
- Answers:
- USD/JPY: United States and Japan
- GBP/USD: United Kingdom and United States
- EUR/USD: European Union and United States
- AUD/USD: Australia and United States
Key Takeaways
- Currency pairs are quoted as a combination of a base currency and a quote currency.
- Pips and spreads are fundamental concepts for calculating forex costs and profits.
- Understanding these basics is essential for analyzing and executing trades effectively.
External Links
- Forex Pip Calculator: Tool to calculate pip values.