What's In a Pair? What Currencies Can Tell Us About Other Markets.
By OTA Instructor Alex Perna
Studying any market, one quickly will realize that there is common and nuanced knowledge that can illuminate certain aspects of analysis and trading in general. If you have ever investigated the foreign exchange market or ForEx you will read about PIPs and interest rates, trends and correlations. One of the most explicit nuances in forex that you come across, and one that may bring an “ah ha” moment is that it trades with pairs.
A pair in forex is a group of two, “a pair”, of currencies. This can be any two! Some of the common currencies used would be US Dollar or USD, Japanese Yen or JPY, Euro or EUR and British Pound or GBP to name a few. Looking at the tickers of the ForEx market you will see the pairs. Pairs will look something like EUR/USD or USD/JPY or EUR/JPY depending on what currencies you are looking at and will vary in price accordingly and are moving constantly. Let us say you are looking at EURUSD and you see that the quote is trading at 1.18. What this is telling us is that 1 EUR is worth 1.18 USD. What is it telling us if we see the quote of USDJPY trading at 105.00? The quote is telling us that 1 USD is worth 105 JPY.
If we think about our trades or even the transactions we make in our everyday life, aren’t we always dealing in pairs? We trade our monies for shares of a company, SPY/USD. We trade our monies for ounces of gold, GOLD/USD. We also trade are monies for t-shirts or the groceries we buy at the store. Couldn’t we think about these as trading pairs, T-Shirt/USD and Food/USD? In the financial markets we see that value is also fluctuating so surely they cannot be priced in themselves. If SPY were priced in SPY what would the value be? … 1. And what would that value ever change? … No because 1 SPY is always worth 1 SPY. Everything must be traded in pairs because if not price will never move.
It is interesting to think about how this mental framework could help us in other markets. When one sees the stock market going up the usual reaction is to think “The stock is gaining in value!” or “The economy is doing well!” but is this always the case? Sure, maybe the stock market is up because the companies are producing value that attracts more investments i.e., higher prices but couldn’t the stock market rally because whatever the market is priced in is losing value? For example: If the pricing currency loses value, it would require more of that currency to buy the same share, or ounce of gold or barrel of oil. On the chart we would see the price going up. I put some charts together as a visual aid of this concept. Not all are quoted in currencies but is a good example of how different the charts can look when paired with different assets. Here we have the broad market, SPY, priced in USD, AUD and GOLD.
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For educational purposes only. Trading is risky and you can lose money.
Same with gold or really anything you can think of. Here we have gold priced in USD, AUD, OIL.
Charts are for illustrative purposes only
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