How Currency Pairs Work in Forex

Forex Trading is weird…

You can’t just buy or sell a currency, you have to trade them in pairs against each other.

So, how do you make sense of this?

If you want to sell (or “short”) the USD, you have to match it up with another currency in order to make a transaction… You can’t just sell the USD.

You must ALWAYS trade two currencies at one time in a “pair”.

The Foreign Exchange Market works through currency pairs, so that’s the only way we can trade it.

And when you think about it, it only makes sense that way; it would be impossible to make a transaction any other way.

Think about it: If I were to go to the currency exchange at my local bank and buy some Euros with my United States Dollars, I’m still using a “Pair of Currencies.” I am buying Euros in exchange for my own currency. Or in other words, I am selling my own money to buy Euros. It works the exact same way in the Forex Market.

Now, the tricky thing about Forex can be understanding the order that the pairs are listed in..

For instance, there are a host of pairs that the USD is the second currency listed (for example: EUR/USD, GBP/USD, AUD/USD), but there are also many pairs that the USD is the first currency listed (for example: USD/CAD, USD/CHF, USD/JPY).

So how do we make sense of this?

Understanding the relationship is actually very simple once you get the hang of it.

Remember, you are ALWAYS buying one currency and selling another when you make a transaction or a trade in Forex.

Which action (buy or sell) to which currency (first or second) can be determined by understanding how the “pair” itself works.

First, a “pair” has 2 parts.: The currency listed first and the currency listed second.

The Currency listed first is Called the BASE CURRENCY–In the EUR/USD, the Euro is the BASE CURRENCY.

The Currency listed second is Called the QUOTE CURRENCY–In the EUR/USD, the U.S. Dollar is the QUOTE CURRENCY.

Now, we are always Buying (going “long”) or Selling (going “short”) a currency pair.

You either sell or buy the pair as a whole.

When taking one of these actions, remember this:

The Action you take, whether buying or selling, is done Directly to the Base Currency and Inversely to the Quote Currency.

 

In other words, if you buy a pair, you are buying the Base (first currency listed) and selling the Quote (second currency listed), so Buying the EUR/USD means that you are buying Euros and Selling U.S. Dollars–this is the same thing as going to the Exchange and “selling” U.S. Dollars for Euros because you are buying Euros against U.S. Dollars.

Here is a Graphic to help explain it:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Understanding which currency you are buying and which you are selling is as simple as understanding the fundamentals of how a “Pair” works.

Remember these few things, and you should have no problem determining how to use Currency Pairs:

1. A pair is listed using two different currencies in a given order

2. The first currency listed is the “Base” Currency

3. The second currency listed is the “Quote” Currency

4. Whatever action you take on the pair Direcly affects the Base Currency and Inversely affects the Quote currency

5. You are always buying one currency AND selling one currency when you make a trade

 

Thanks for reading! Be sure to “Like” my article on Facebook if you did, in fact, like it 🙂

Also, feel free to leave a comment or questions below!

 

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Winners Edge Trading was founded in 2009 and is working to create the most current and useful Forex information and training available on the internet.

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  • ohoraherecaptain

    This is the first time I have read about this subject with clarity. Why all majors don’t have the USD as their quote currency is something to know about but this is a very good start. Thanks Casey.

  • ana

    Hi Casey!!!

    Simple, easy to understand. It likes so much. The traders need many articles like this.

    Thank you

  • Phil m

    Explanation is in layman’s terms and I understand it. Only one question. I’m curious how come USD is not the base for all currencies ?

  • Cazzie

    I think this article is very well explained. I can trade, mostly badly, but really enjoy it non the less.
    Well done

  • Antnony

    Good information but I wanted to know the relationship between different pairs, for example if you are buying EURUSD, will it be prudent to sell USDCHF or USDJPY since in the first eurusd trade you are selling the USD

  • Paul B.

    Pair info. is great. Hope I can print it off. Also would appreciate a simular one on basics of Forex for us newbies and print able too. Thanks Paul B.

  • richard

    Had no idea that it worked that way…very informative

  • NathanTucci

    Thanks for the comment, we will definitely be posting regularly. Here is a strategy article for trending markets, you could check out: http://winnersedgetrading.com/trend-continuation/

  • gaurav tiwari

    good article..keep posting such knowledgeble …thanks

    glad if u will post some trading strategy…thanks in advancee

  • NathanTucci

    Hey Robert, you are welcome! Thanks for reading!

  • Robert M.

    very useful for us newbies….thanks