Currency Pairs Decoded

By Sean Hyman One of the first things you learn in the Forex game is that currencies are always traded in pairs. This is why currencies are always listed in twos: USD/JPY, EUR/USD, etc.

But once you know that, there are still other questions to answer. For example, why are currencies traded in pairs? What makes up a currency pair? How can you tell what a currency pair is worth? And exactly what currencies easily trade in pairs so you can invest in them?

This is important to know – because once you understand currency pairs, you’re one step closer to trading in this incredibly liquid, profitable market. So let’s dig right in.

The Guts of a Currency Pair

Currency pairs have two parts, the “base currency” and the “quote currency.” The base currency is the first currency listed in the pair. The quote currency is listed second. A currency pair’s price is actually telling you what the base currency is worth in relation to the quote currency.

For example, if you look at the pair EUR/USD, the euro is the base currency and the U.S. dollar is the quote currency. And by looking at this pair, you’re trying to determine what a euro (the base currency) is worth in dollar terms (the quote currency).

First of all you can look at a graph, a quote screen or a website that tracks currencies to find the value. Any place you look, they will list the currency pair as a fraction or decimal. It’s showing exactly what the base currency is worth in relation to the quote currency.

For example if you looked at the EUR/USD and it said “1.26,” that would mean that 1 euro is worth US$1.26. If you were looking at a chart, it would show you how the euro is strengthening in relation to the dollar.

Currencies are traded in pairs because you can only tell what one currency is worth when you compare it to another currency. This makes sense if you think about it. You can tell how much your stocks are worth because they’re priced in dollars. But if you want to know how much the dollar is worth, you have to compare it to another currency like the Swiss franc, Japanese yen, euro etc.

When you compare currencies in a pair, one currency listed is always appreciating or depreciating against the other. I call this the “seesaw effect” because when one currency in the pair drops, the other rises.
I’ll be back soon with more trading basics. Until then…

Best Regards,

Sean

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.