What you'll learn
- Identify the base and quote currency in any pair
- Read a price correctly
- Know what buying and selling a pair actually does
Reading a pair
The convention is base/quote. The base is always one unit, and the price is the amount of quote currency it buys. GBP/USD at 1.2500 means one pound costs 1.25 dollars. USD/JPY at 150.00 means one dollar costs 150 yen. The order of the two currencies in a pair is fixed by market convention, which is why you will see EUR/USD but never USD/EUR.
Buying and selling
Buying a pair, also called going long, means buying the base currency with the quote currency. You profit if the base strengthens, which shows as the price rising. Selling a pair, or going short, means selling the base for the quote, and you profit if the price falls. Because you always hold one currency against another, there is no such thing as staying out of a currency; you are simply choosing which side of the pair you hold.
The direction question
New traders often trip over pairs where the currency they have a view on is the quote. If you think the yen will strengthen, you do not buy JPY; you sell USD/JPY, because a stronger yen means fewer yen per dollar and a lower price. The rule is: form your view on the base currency and trade the pair in that direction, or form it on the quote and trade the opposite way.
Example: Turning a view into a trade
You think the Australian dollar will weaken against the US dollar. The pair is AUD/USD, with AUD as the base. A weaker AUD means each Australian dollar buys fewer US dollars, so the price falls. To profit you sell AUD/USD. If it moves from 0.6500 to 0.6400, you sold at 0.6500 and can buy back at 0.6400, and the 100-pip difference is your profit on the size you traded.
Key takeaways
- Base is first and always one unit; quote is second and is what the price is measured in.
- Buying a pair means buying the base and selling the quote.
- If your view is on the quote currency, trade the pair in the opposite direction.
Knowledge check
Trading forex, CFDs and other leveraged products carries a high risk of losing money. This lesson is general education, not advice. Risk disclosure.