The Peculiarity Of Forex Pairs

One of the most confusing theings to new traders when they come to the forex market for the first time is seeing how the markets are traded in pairs. All of the major pairs are traded involving the US dollar.

When you look at a forex chart, in the corner you will find the pertinent information displayed. Let's say you are interested in trading the most liquid currency. That would be the Euro. But as "trading" implies, you are setting one thing of value against another. In this case you are trading the Euro against the US dollar (USD). In the information area of the chart, you will see EUR/USD. That tells you the currency pair. you will also see a number such as 1min, 5min, 15min, or 1H 4H or 1D. This tells you the time frame of the chart. We'll deal with time frames another day. For now let's continue to tackle the pairing pickle.

When you look at the EUR/USD chart, if the price action is going upwards, that means the Euro is rising against the dollar. If you see the chart heading downwards then the Euro is falling against the dollar (and the dollar is rising against the Euro). So if you are buying, or going "long" the Euro, it means you expect the Euro to go up and appreciate versus the dollar. If you are looking for the dollar to appreciate against the euro, you would be looking for the price action on the chart to go downward.

All currencies are traded in pairs that way, although not all charts will follow the same pattern. In this case the euro is listed first in the pair. But in some pairs like the USD/JPY (dollar vesus Japanese Yen) or USD/CAD (the US dollar versus the Candian dollar) the charts are opposite, because the USD is listed first. If you are looking for our dollar to strengthen, the you are looking for the chart to move upward, just the opposite of the euro.

All of this seems a bit confusing, but I've found it helpful to think of it this way. When buying a stock, I'm actually doing a paired trade just like in the currencies. I'm buying the stock but selling my dollars. I do that because I believe that the stock will appreciate faster than the dollars, which means I can sell the stock for more than I paid for it. When I sell the stock, I am buying dollars. Because I believe that the stock will depreciate faster than my dollars will, and I can buy the stock back later on at a lower price.

Currencies are the same way. The whole forex market trades in pairs. You buy the one you think will appreciate faster than the other. And you can also sell one and buy the other, in a technique called short selling, or shorting. We'll talk more about that tomorrow.

Until next time...Happy Trading!

Bill