As with every financial market, the forex market consists of its own trading methods, terminology and conventions. When entering the trading market as a new investor, a basic understanding of the forex lingo will assist you.
One key term foundational to the forex market is currency pairs. Currencies are listed by pairs, with names that combine the two different countries’ currency being traded against each other. This is important because the purchase of one currency always involves the simultaneous sale of another currency. An exchange takes place. This is also where the term “foreign exchange” originates.
Currently, the U.S. dollar is the central currency against which other currencies are traded. The U.S. dollar’s principal role in the forex market is for a variety of reasons.
World-wide, the U.S.…
- has the largest national economy
- has the largest and most liquid government debt markets
- dollar is the dominant international reserve currency
- dollar is the means of exchange for the majority of cross-border transactions
- is a military superpower with a solid, established political system
All the major currency pairs have the U.S. dollar on one side of the transaction. The codes for each currency are written using International Standardization Organization terminology. The major players involve the Eurozone, Japan, the United Kingdom, Switzerland, Canada, Australia and New Zealand.
However, not every forex market transaction involves the U.S. dollar. In those cases, cross-currency pairs are involved. A cross-currency pair, also known as cross or crosses, is any currency pair that does not include the U.S. dollar.
Nevertheless, they are calculated based on the USD pairs but are quoted independently. Crosses afford traders opportunities to target specific individual currencies in order to benefit from a world event.