In forex market we have financial instruments. These financial instruments are what allow us to engage in that particular financial activity. For instance in the stock market we are dealing with stock and shares which are symbolically represented by their tickers. So what about the foreign exchange market? Well, in the forex market we have symbols which make up the currency pairs.
But there are special relationships between these symbols and the way they form a forex trading pair together. And it is crucial that you fully understand the relationship that exists between such pairs and be able to use it to your advantage in the trading process. This is why in this article we are going to take a journey through forex pairs!
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What Are Forex Symbols?
As we discussed a little bit in the intro, we have financial instruments in any financial market that allows traders to engage in that particular activity related to that market. It could be buying and selling shares, stocks, commodities, futures, options, what have you. And indeed in the forex market where we are trading foreign currencies, those currencies are the instruments for the trade.
But all of these instruments have a visual representation form. In the forex market we call them symbols.
Symbols in the forex market are essentially three-letter signs that symbolize and represent a foreign currency. For instance the US dollar is shown with the symbol USD, the British pound sterling with the symbol GBP, the Euro with the symbol EUR, the Chinese Yuan with the symbol CNH, and the Swiss Franc with the symbol CHF. There are innumerable symbols found in the forex market. In fact there are as many symbols as there are foreign currencies found in this market.
But they are almost never used alone. Symbols are used two by two in order to form trading pairs. In the next section we will discuss just that.
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How Do Symbols Form Trading Pairs?
As we briefly mentioned in the last section, forex symbols do not just stand alone. They are indeed used in their combination with other forex symbols. These combinations of symbols two by two are known as forex trading pairs.
So each pair, as the name obviously suggests, is made from two symbols. This is exactly how traders are able to carry out trades in the forex market. Because remember it is literally called the forex or the foreign exchange market. So there is always the element of exchange in the equation. But exchange with what? With another currency of course.
And in this way forex symbols form pairs which are then used directly by traders to execute trades in the forex market. Now let’s take a closer look at the composition of these trading pairs.
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What Is the Meaning of Base and Quote Currencies in forex?
A trading pair is called that because it is made from a pair of currencies. And these pair of currencies have special names and terminologies and also special characteristics.
Let’s go over the terminology first. In any given forex pair, the first currency is known as the base currency and the second currency in that pair is called the quote currency or sometimes referred to as counter currency.
Now there is a reason why they are called that. The base currency forms the basis of the pair. On the other hand the quote currency forms the counter side of the pair. This means in any situation when we look at the price of a foreign currency pair we are looking at its quoted price. The quoted price is the price of the base currency in terms of the units of quote currency.
What does it mean? Let’s clarify with an example.
For instance, if you look up the pair EUR/USD which is the trading pair where Euro is the base currency and the US dollar is the quote currency, you will probably see something like this: 1.08
This is known as the quoted price for this pair. The quoted price is the price of the base currency in the counter currency. So this means if EUR/USD is said to be 1.08 then it means each Euro is worth 1.08 US dollars.
As long as we are discussing forex symbols, let’s take a look at some other related concepts, bid/ask price and pips.
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What Is Bid and Ask Price?
Another important concept that is also related to the forex symbols and the way they form pairs is the concept of bid/ask price. You probably hear or see this term a lot in the market.
There is a really easy trick to understand this concept. Just think about the bid/ask price from the point of view of the broker and not yourself as a trader. In this case it can be understood that the bid price is the price at which traders can sell their currencies and on the other hand the ask price is the price at which traders can buy currencies.
What Is the Relationship Between Symbols and Pips?
One final stop before we leave you with this informative article on forex symbols. What exactly are pips? This is another concept that you no doubt encounter a lot in the forex market.
Just remember that each pips for forex symbols are representative of their smallest price change.
So the price of forex symbols changes all the time. But these changes are almost usually very small. This is why we need a measuring unit that can detect such small movements.
This is exactly what a pip is for. A pip measures the fourth decimal digit in the price of forex symbols and each single change in that decimal digit is equal to one pip.
So for instance in the pair EUR/USD which we discussed earlier, if we show the quoted price for these symbols as 1.0812 and the quoted price goes to 1.0813 then that is a change of 1 pip.
Conclusion
Forex symbols are the way we represent foreign currencies in the forex market. These are three-letter signs which correspond with each currency. We put symbols together to form forex pairs. In this article we discussed forex symbols comprehensively and all their different aspects.
