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CHAPTER 10:
 
 
Pairs Trading
Currency Pairs
n the Forex, the value of one currency is only relevant when compared
to another, which is why we talk about currency pairs.
The currency that is used as the reference is called the base currency;
the money that is quoted, concerning the base currency, is instead called
"quoted" or "secondary."
In the case of the Euro/Dollar pair, written Eur/Usd, the currency on the left
is the Base currency, so in this case, the Euro, and the quoted currency is on
the right, in this example the Dollar.
Therefore, the price of the Eur/Usd quotation tells us how many units of the
quoted currency are needed to buy one unit of the base currency.
Let's see a quick example:
Very simply, if the current price of Eur/Usd is 1.10897, it means that 1€
corresponds to 1.10897$.
The term Long or Buy indicates the purchase of a pair of currencies in
which we assume a rise in prices, thus focusing on the increase in the value
of the base currency and therefore on a weakening of the currency quoted.
With the term Short or Sell, we mean instead the sale of a currency pair, in
which we assume a fall in prices, so we expect a decline from the base
currency.

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Let us take a case where the Euro/Dollar pair’s current quotation price is
1.10. This means that 1€ equals 1.10$.
If at this point we open a Buy operation, and the price subsequently rises
from 1.10 to 1.20, it means that at this point 1€ is equivalent to 1.20$, so the
value of the Euro against the dollar has increased: you need more dollars to
have 1€ and, consequently, we are in profit because we have opened a
bullish operation, called Buy or Long.
On the contrary, always assuming the quotation 1.10 as the current starting
price, we decide to open a transaction Sell: then, betting on a fall in prices,
i.e. a devaluation of the base currency, we will gain if the price goes down
from 1.10.
If then the price goes down to 1.05, we will be in profit. Conversely, if the
price should rise above the threshold of 1.10 (for example to 1.15), we
would better be selling or we will be losing money.
Further, we will see how profit is calculated based on price movements.
In the meantime, I hope we have understood that the relationship between
two currencies is called currency pair. These pairs can be divided into three
macro-categories:
Major Pairs.
Minor Pairs (or Cross).
Exotic Pairs.
Major Pairs
Major or significant pairs are all major currency pairs that contain the US
dollar, either as a base currency or as a quoted currency.

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These pairs generate the most trading activity on the currency market. The
main features of these significant pairs are higher liquidity and lower
spreads.
The most frequent pair traded in absolute is the Euro/Dollar with 28% of
total transactions, followed immediately by the pair Dollar/Yen with 14% of
the transactions.