The Essential Lexicon in Forex

The term “forex” itself is a shorthand way of saying “foreign exchange.” The world’s countries use a specific type of currency as money for people within its borders to receive from working and to spend. When somebody travels from the United States to France, they must exchange US dollars for euros to pay for their food, hotel and souvenirs. They are in effect buying those euros with their dollars.

Currency PairsThe Essential Lexicon in Forex
Forex trades usually are expressed as a generic ratio of one type of currency to another: EUR/USD, USD/JPY and so on. Every currency is given a three-letter abbreviation that is obvious. EUR is euro, USD is US dollar, JPY is Japanese yen, and so.

Base Currency or Transaction Currency
The currency on top of the ratio expressed as a fraction. In EUR/USD, the base currency is the euro, and it automatically has a value of 1.

Counter Currency or Quote Currency
The currency on the bottom of the ratio expressed as a fraction is the counter currency. In EUR/USD the counter currency is the US dollar. Its value is what changes according to the market. If, for example, it takes $US1.25 to equal 1 euro, the math is simple. 1/1.25 equals 0.8. $100 is worth 80 euros. It’s easier to visualize if a tourist imagines they are visiting Paris with US dollars in their wallet or purse. After landing, they go to a currency exchange booth in the airport and pull out $100 cash. They will get 80 euros in exchange. If the euro falls in value relative to the US dollar, that is good for the tourist. From the point of view of their cash, the $100 is the same. But if they receive 85 euros for it instead of 80, they can see they have 5 additional euros to spend for $100.

The Majors
The most common currencies are the British pound, the euro, the Australian dollar, the Japanese yen, the Swiss franc, the US dollar and the Canadian dollar. The most commonly traded currency pairs in the world are EUR/USD, USD/CAD, NZD/USD, USD/CHF, AUD/USD and USD/JPY.

Cross Pairs
These are pairs that do not include the USD, such as AUD/JPY and EUR/CHF.

Pip or Point
This is the smallest move a currency can make up or down. For the pairs GBD/USD, USD/CHF and EUR/USD, it’s four places to the right of the decimal point: 0.0001. For USD/JPY, it’s two places to the right of the decimal point: 0.01.