Currency Trading has emerged as the fastest growing online investment to date. Those looking for alternative avenues of investment other than mutual funds or stock trading have found the currency exchange market to be a rewarding if risky endeavor. This hubpage is an in-depth look at the traded currencies that enable the forex trader to earn large profits or rack up huge losses.

All traded currencies are expressed as pairs. Typically, they look like this : Eur/Usd. Or like this Gbp/Jpy. They are all abbreviated versions of the currency separated by the / symbol. The first currency in the pair is known as the base currency while the second currency is known as the quote currency.

Base currency : Eur/Usd

Quote currency : Eur/Usd

Why are currency pairs used in the currency exchange market? It is a means of determining the value to each currency in the pair. In this case, the value of a currency can be determined when compared to another currency. If someone mentions to you that the US dollar appreciated, the correct response would be, appreciated against what? The yen? Gold? My Kitchen Cabinet? So a comparison is needed.

Whenever you go long (Buy) on a currency pair, you are essentially buying the base currency and selling the quote currency.

Buying the Usd/Jpy = buying the US dollar and selling the Japanese Yen.

Conversely, when ever you go short (sell) on a currency pair, you are selling the base currency and buying the quote currency.

Selling the Usd/Jpy = Selling the US Dollar and Buying the Japanese Yen.

It is the relationship between the currencies that determine if our trade is turning a profit or in the red zone. If the price of Usd/Jpy rises above the price i bought the pair at, i will be making unrealized profits. The opposite is true if i sold the pair and the price dips below the buying price.

To summarize :

Long : Price is above buying price minus spread = Unrealized profits

Short : Price is below buying price minus spread - Unrealized profits

The opposite means you are making unrealized losses.

Above i mentioned something called the spread. What is it? The spread is a one time fee paid to your forex broker whenever you open a trade.No further costs are incurred after the spread has been paid. Although some brokers do charge commissions on top of the spread, they are not all that common or popular.

Spreads vary according to the forex broker, currency pair and the time you made the trade. Most forex brokers have variable spreads, meaning they fluctuate.

The forex broker that currently offers some of the lowest spreads is FXCM. Where most brokers are charging 7-9 pips on the Gbp/Jpy, FXCM charges 4-5 pips. Which is great news for forex traders like myself, because 90% of my trades are on the Gbp/Jpy.

Most of the popular currency pairs have spreads that are reasonably low. 1-3 pips for the Euro/Usd, 3-5 for the Gbp/Usd and 2-4 for both the Eur/Jpy and the Usd/Jpy. As mentioned above, the spread varies according to the broker and time. During periods where high impact economic news are being released such as the trade balance, unemployment rate and god forbid, an interest rate change, the spread can increase quite dramatically.

So this is brief hubpage on the workings of currency pairs. I'll touch on other areas such as margin, leverage, candlesticks and price action trading (my preferred method) in future hubs. Thanks for reading!