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Please check out our trading guides to learn about what is Forex trading, how Forex trading works, the benefits of Forex trading, and more.
Once you’re clear on the basics, the next task on the list is understanding currency pairs. So, exactly how to read currency pairs?
Forex quote comprises two currencies or a currency pair, like USD/CHF and GBP/USD. USD here is US Dollar, GBP is Pound Sterling, and CHF is Swiss Franc.
Each currency is abbreviated with three letters, also called ISO code. The first currency (left) in the pair is called the base currency, and the second one (right) is called quote currency. The first currency’s price is reflected in the unit of the second currency. This indicates the amount of second currency (quote) you need to buy the first one (base). For example, in EUR/USD currency pair, EUR is the base currency, and USD is the quote currency. This means, per the existing exchange range, you need 1.19 US dollars to buy 1 Euro.
Now, coming to the actual price, there are two separate prices of a currency pair: Bid price and Ask price. Bid price is the buying price. It’s a price a trader is ready to pay to buy a security. Ask price is the selling price. It’s a price a trader is ready to sell a security at.
You will find a difference between the bid and ask price, and this difference is called a spread. In our example of EUR/USD, you may see bid and ask prices something like 1.1950/1.1954. The bid price is lower than ask price, which is usually the case. Here, the spread is 0.004.
When it comes to trading, if you expect the value of the base currency to increase, you will ideally open a buy position. On the other hand, if you anticipate the value of a base currency to decrease, you would open a sell position. This is the most fundamental concept of profitable Forex trading.
There are three broad types of currency pairs: Major, Minor, and Exotic. Major currency pairs are the most traded currencies that usually have the highest liquidity and lowest spreads. Minor currency pairs are the ones that do not include the US dollar. Exotic currency pairs are the ones that include one major currency and one currency of a developing country.
Some of the most traded currency pairs in the world include EUR/USD, USD/JPY, AUD/USD, USD/CAD, GBP/USD, USD/CHF, and EUR/GBP. Which currency pair you should invest in depends on your needs, goals, portfolio, risk appetite, and various other factors.
To learn about other aspects of forex trading, you can access more of our educational resources here.