Foreign Currency Exchange Basics

Forex uses abbreviations for the currencies traded known as ISO codes. They are developed by the International Organization for Standardization. In addition to their abbreviations, currencies have nicknames that are used by traders in their daily conversations. Some of the ISO abbreviations and nicknames include:

Exchange rates are used when trading with currencies and represent the value of one currency against another. Thus, currencies are paired and an exchange rate between them is set. The paired currencies and the corresponding exchange rate presents how much of the one currency can be purchased with a unit of the other.

When examining a pair of currency you should have in mind that the currency that comes first in the pair represents the base, whereas the second one is the counter (quote) currency.

Therefore, if you want to buy a currency, the exchange rate will show you how much of the counter currency you have to pay in order to buy one unit of the base currency.

There is a fixed order in which currencies are quoted. Generally, due to its major role in the world economy the dollar is quoted first in the pair. After this the other currencies are placed. Thus, quotes are in terms of a unit of $1 per the other currency in the considered pair (exceptions: Great Britain pound, the Euro, Australian dollar).

In order to facilitate your understanding process of currency pairs, when you buy a currency pair think of the base currency as the one you are buying and of the counter currency as the one you are selling. On the other hand, the reverse is true for the selling process. Namely, you are selling the base currency and purchasing the counter currency.

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