How Currency Pairs Work: Master FX Currency Pairs In 5 Min
Forex Trading is weirdโฆ
You canโt just buy or sell a currency, you have to trade them in pairs against each other. So, how do Forex pairs work?
Weโre going to show you how currency pairs work in just a moment.
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Table of Contents
Intro: How Currency Pairs Work?
This is one of the more important articles in our Forex Trading 101 series.
We are going to give you a basic understanding of how currency pairs work in Forex trading. We want you to really understand why we trade pairs against each other, and how to wrap your head around some of the concepts of currency pairs.
In another article, we will focus on Currency Pair Characteristics. Each currency pair has a different utility for the global market, so there are certain aspects of each pair that are important to understanding Forex currencies in a holistic way.
And yet, another article will specifically focus on the EUR/JPY currency pair. It is an important Forex Pair to understand, so we made a trading strategy for it.
After that, we decided to compile a guide focusing on Warren Buffettโs views on Currency Trading.
Finally, we want to share our compilation of currency trading strategies that work in 2023 and beyond.
Letโs continue learning about, how Forex pairs work!
Forex Currency Pairs
If you want to sell, also known as โshortโ, the USD, you have to match it up with another currency in order to make a transactionโฆ
You canโt just sell the USD. You must ALWAYS trade two currencies at one time in a โpairโ.
Theย Foreignย Exchange Market works through currency pairs, so thatโs 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, Iโm still using a โPair of Currencies.โ I amย buying Euros in exchange for myย 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).
Making Sense Of Forex Currency Pairs
So how do we make sense of this?
Understanding the relationship is actually very simple once you get the hang of it.
Remember this: You are ALWAYS buying one currency and selling another when you make a transaction or a trade in Forex.
Understanding how the currency pair itself functions, enables you to determine whether to buy or sell a specific currency.
A Currency Pair as 2 Parts:
- The currency listed first
- The Currency listed first is Called the BASE CURRENCYโIn the EUR/USD, the Euro is the BASE CURRENCY.
- The Currency listed second.
- The Currency listed second is Called the QUOTE CURRENCYโIn the EUR/USD, the U.S. Dollar is the QUOTE CURRENCY.
Now, we are always buying (going โlongโ) or Selling (going โshortโ) 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.
Trading Strategy Guides
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. Dollarsโthis is the same thing as going to the Exchange and โsellingโ U.S. Dollars for Euros because you are buying Euros against U.S. Dollars. You can also read the best strategy onย how to use currency strength for trading success.
How currency pairs work example:
Understanding which currency you are buying and which you are selling is as simple as understanding the fundamentals of how a โPairโ works.
Conclusion โ How Do Forex Pairs Work
Remember these few things, and you should have no problem determiningย how to use Currencyย Pairs:
1. A pair is listed using two different currencies in a given order
2. The first currency listed is the โBaseโ Currency
3. The second currency listed is the โQuoteโ Currency
4. Whatever action you take on the pair Directly 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
Feel free to leave a comment or ask any questions below regarding how currency pairs work in Forex!
very useful for us newbiesโฆ.thanks
Hey Robert, you are welcome! Thanks for reading!
good article..keep posting such knowledgeble โฆthanks
glad if u will post some trading strategyโฆthanks in advancee
Thanks for the comment, we will definitely be posting regularly. Here is a strategy article for trending markets, you could check out: https://tradingstrategyguides.com/trend-continuation/
Had no idea that it worked that wayโฆvery informative
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.
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
I think this article is very well explained. I can trade, mostly badly, but really enjoy it non the less.
Well done
Explanation is in laymanโs terms and I understand it. Only one question. Iโm curious how come USD is not the base for all currencies ?
Hi Casey!!!
Simple, easy to understand. It likes so much. The traders need many articles like this.
Thank you
This is the first time I have read about this subject with clarity. Why all majors donโt have the USD as their quote currency is something to know about but this is a very good start. Thanks Casey.
Hey!Nice read.I have a question though.When selling/buying the base currency in a currency in the pair?Am I selling when it is strong and buying when it is weak?
It really depends on the specific trading strategy you use.