Most Professional Forex Traders Don't Even Know This...Posted 06/05/2009, 9:00 am EST by Sean Hyman from worldcurrencywatch.com
When you start trading in the Forex market, one of the first things you learn is how to read currency pairs.
You learn that the first currency listed in any pair is only worth something in relation to the second currency in that pair. For example, the EUR/USD tells you how much the euro is worth in U.S. dollars.
You also learn pretty fast that you can only trade certain pairs - and they all have symbols similar to stock symbols. I've listed the major currency pairs with their symbols below so you can get an idea of what these pairs look like.
- EUR/USD (euro/U.S. dollar pair)
- USD/JPY (U.S. dollar/Japanese yen pair)
- GBP/USD (British pound/U.S. dollar pair)
- USD/CHF (U.S. dollar/Swiss franc pair)
- USD/CAD (U.S. dollar/Canadian dollar pair)
- AUD/USD (Australian dollar/U.S. dollar pair)
- NZD/USD (New Zealand dollar/U.S. dollar pair)
And the symbols are always listed in that order. For example, if you want to trade the U.S. dollar vs. the euro, you always use the EUR/USD symbol.
But have you ever wondered why it's like that? Have you ever thought out about why you can trade the EUR/USD, but not the USD/EUR...or why you can trade USD/JPY, and not the JPY/USD?
If you don't know , don't worry. You're not alone. I've been trading currencies for years and most Forex traders don't even know why the Forex market uses these symbols in that order - not even the pros.
But if you're one of the few who understands why the pairs are listed as they are, it actually makes you a more knowledgeable and well-rounded trader. It also helps you quickly read currency pairs, which helps with your speed and accuracy as a trader.
In my research, I've also found that there is rhyme and reason to what seems like random pairings. Let me show you...
The Need for Order
The world has always needed a standardized way to do just about everything - particularly in the markets. You need order so that everyone can exist and trade in the same market. Otherwise, you would have no way to communicate with fellow traders exactly what you're buying and selling.
So when the Forex market first began, traders needed some established standard so they could refer to currency pairs and find out prices.
You see the first listed currency in the currency pair is called the "base" currency. The currency listed secondly is known as the "quote" currency.
If you have EUR/USD trading at 1.30, then 1 euro = US$1.30. If the euro strengthens to 1.35 then 1 euro now equals US$1.35 dollars.
What the Heck Is the ISO?
So who got the honor of designating which currency would be listed first and second? It was the International Organization for Standardization (ISO). This organization sets standards for all kinds of things, not just currencies. It sets industrial and commercial standards too.
They are a non-governmental organization based out of Geneva, Switzerland. Their standards are so precise that they often become law.
In fact, approximately 157 out of the 195 countries of the world use the ISO to standardize various items. So this powerful organization has major influence for not even being a governmental organization.
So they set up which currency is listed first and which currency is listed second in each currency pair. But how did they decide which was which?
There are a couple of important factors that helped to determine the order. Let's start with the pound.
It's no secret that London is the FX center of the currency universe. After all, the British pound is still nicknamed the "cable" because currency trading between New York and London was once done via transatlantic undersea cable. In other words, currency trading goes WAY back in London.
Today, the London market facilitates more currency trades than anyone. So it only made sense to put them at the top of the list. That's why the British pound is listed first in the GBP/USD pair.
Also, the strong British pound spent years with a significantly higher value than most of the other majors. Its higher value helped confirm its placement as the currency listed first in pairs.
The Pound Dethroned by the Euro!
The Queen Couldn’t Have Been Happy.
Simple enough right? Well, then the euro came along.
The euro officially started trading on January 4, 1999. But today, if you want to trade the British pound against the euro, you have to trade the EUR/GBP pair. So why is it listed as EUR/GBP rather than GBP/EUR?
Actually, at first, both Reuters and EBS (the two main quoting services) quoted the euro/pound pair both ways when the euro first started trading. At the time, the London traders hated that there was even a question as to whether the pound should be first.
However, Reuters and EBS decided that they would allow the market to decide which would last. It wasn't long before the market determined that EUR/GBP was the clear winner. So at that time, the "GBP/EUR" ceased to exist. It's been the EUR/GBP pair ever since.
How to Easily Tell Which Currency Is Listed First
It was this event that bumped the euro ahead of the pound as "king of the currencies." So this became the order of hierarchy from that point on:
- Euro (EUR)
- British pound (GBP)
- Australian dollar (AUD)
- New Zealand dollar (NZD)
- United States dollar (USD)
- Canadian dollar (CAD)
- Swiss franc (CHF)
- Japanese yen (JPY)
Once this order was established, you could easily tell which currency is listed first. The higher currency on this list is always listed first. If you're trading a currency that's lower on the list, it's always listed second.
For example, the Aussie dollar is higher on the list than the U.S. dollar. So if you're pairing them together, the symbol is AUD/USD, according to the list. Mystery solved!
What about the Exotics? Where Do You Put Them?
This covers the "major" currencies. What about the "minor" or "exotic" currencies such as the Mexican peso or the Russian ruble or the Turkish lira?
In that case, the major currency always has the first place and the exotic currency takes second place. So the pairs look like: USD/MXN, USD/RUB, EUR/TRY, etc.
This is also important to note: Every once in a while, governments revalue their currencies. This tends to happen more in emerging economies than in developed countries, but it does happen.
When a government revalues their currency, they also change the currency's symbol. That way the "new" currency or revalued amount won't be mistaken for the old one.
For example, the Mexican peso used to be listed as the MXP. When the government revalued the peso, the symbol changed to MXN. Russia also went from being RUR to RUB, etc. Brazil also has had many symbol changes through the years as well.
Like I said, most professional traders don't even understand how currencies are paired. Instead, they usually just memorize the pairings. So now you have a handy guide to currency pairing, that many professional Forex traders don't even know.