Currency pair
Lesson 1 of 31 in the course “Forex”. Free, with animations and a quiz.
One currency priced in another
Forex is the market where one currency is exchanged for another. You always trade a pair there. For example: EUR/USD = 1.1244 means 1 euro costs 1.1244 dollars. The first currency in the pair, EUR here, is the base: it is the one you buy or sell. The second, USD, is the quote: the price is expressed in it. In short: how much of the second currency you get for one unit of the first.
Buying or selling a pair
Buying a pair is a bet that the base currency gets more expensive against the second one. Selling is a bet that it gets cheaper. For example: you bought EUR/USD at 1.1244 and the rate became 1.1245. The euro rose against the dollar, and you are slightly in profit. That 0.0001 step is called a pip, more on it in the next lesson. You can sell a pair without owning euros: that is a bet on a fall.
Spread: the cost of getting in
A pair always has two prices. The ask is the price you buy at. The bid is the price you sell at. The ask is slightly higher. The gap between them is the spread, a hidden cost of the trade. For example: ask 1.1246, bid 1.1244, spread 1.1246 − 1.1244 = 0.0002, which is 2 pips. Buy and close right away and you are down by the spread. Not a bug, a feature.
Check yourself
- EUR/USD went up. What happened?
Correct answer: The euro rose against the dollar. The rate shows how many dollars you get for 1 euro. More dollars means the euro, the base currency, got stronger. - You expect the euro to rise against the dollar. What do you do?
Correct answer: Buy EUR/USD. Buying a pair is a bet on the base currency, and here the base is EUR. Buying USD/EUR would be a bet on the dollar. - What is the spread?
Correct answer: The gap between buy and sell prices. The spread is the gap between ask and bid. It is a built-in cost of the trade, so right after entry you are slightly down.