Base and quote

Every FX price is a ratio between two currencies, and the order they are written in is not decorative. Getting the direction right is the first thing to make automatic, because every later calculation, from pip value to which way a rate hike pushes price, depends on it.

Reading a pair

A pair is written BASE/QUOTE. The price tells you how much of the quote currency one unit of the base currency costs.

EUR/USD = 1.0850 means one euro costs 1.0850 US dollars.

USD/JPY = 150.20 means one US dollar costs 150.20 yen.

The base is always the thing being bought or sold, one unit at a time. The quote is the money you pay or receive for it.

Buying and selling a pair

"Buy EUR/USD" means buy euros, pay dollars. You profit if the euro strengthens against the dollar, that is, if the price goes up.

"Sell EUR/USD" means sell euros, receive dollars. You profit if the price goes down.

Always think of it as a trade in the base currency, funded by the quote currency. Two consequences:

1. Every FX trade is a long and a short at once. Long EUR/USD is long euros and short dollars. There is no such thing as being "just long the euro."
2. Going short is as natural as going long. There is no borrowing of shares; you simply sell the base and hold the quote. Spreads and costs are symmetrical.

The convention for which currency comes first

Pairs are quoted the same way at every broker, following a market-wide convention. The rough pecking order is EUR, GBP, AUD, NZD, USD, CAD, CHF, JPY: the currency higher in the list is the base. So it is EUR/USD not USD/EUR, GBP/JPY not JPY/GBP, USD/CAD not CAD/USD.

This is why some majors have USD as the base (USD/JPY, USD/CHF, USD/CAD) and some have USD as the quote (EUR/USD, GBP/USD, AUD/USD, NZD/USD). It matters for the direction of a "dollar move":

• Dollar strength pushes EUR/USD, GBP/USD, AUD/USD and NZD/USD down.
• Dollar strength pushes USD/JPY, USD/CHF and USD/CAD up.

Beginners regularly buy USD/JPY expecting to profit from yen strength. Yen strength makes USD/JPY fall.

Key idea: The price of a pair is the price of one unit of the base in terms of the quote. Buying the pair means buying the base and selling the quote. If you are ever unsure which way a move helps you, restate the trade as "I am long X and short Y."

Bid, ask and which one you get

Every pair has two prices. The bid is where the broker buys the base from you (so it is the price you sell at); the ask (or offer) is where the broker sells the base to you (the price you buy at). The ask is always higher.

EUR/USD 1.08500 / 1.08508: you buy at 1.08508 and sell at 1.08500. The difference, 0.00008, is the spread, and it is paid on every round trip. Lesson 3 converts that into pips.

A quick check on the mechanics: if you buy EUR/USD at 1.08508 and immediately sell at 1.08500, you lose 0.00008 per euro. On 10,000 euros that is $0.80. Nothing has happened in the market; you have simply paid the spread.

Inverting a rate

Sometimes you need the rate the other way round. If EUR/USD = 1.0850, then USD/EUR = 1 / 1.0850 = 0.9217. One dollar buys 0.9217 euros. This comes up when you convert pip values into your account currency (Lesson 4) and when you sanity-check cross rates.

Cross rates are pairs that do not include the dollar. They can be derived from two dollar pairs:

EUR/GBP = EUR/USD ÷ GBP/USD. With EUR/USD at 1.0850 and GBP/USD at 1.2700, EUR/GBP = 1.0850 / 1.2700 = 0.8543.

EUR/JPY = EUR/USD × USD/JPY = 1.0850 × 150.20 = 162.97.

Brokers quote crosses directly, but they are priced off the dollar legs, and their spreads are wider because the broker is effectively spanning two markets.

Try it: With EUR/USD at 1.0850, GBP/USD at 1.2700 and USD/JPY at 150.20, compute GBP/JPY and EUR/GBP by hand. (Answers: 190.75 and 0.8543.) Then check them against a live quote screen; the difference should be small and mostly explained by the time gap and spread.

Recap

• A pair is BASE/QUOTE; the price is how much quote currency one unit of base costs.
• Buying a pair means buying the base and selling the quote; you profit when the price rises.
• Dollar strength pushes USD-quote pairs (EUR/USD, GBP/USD) down and USD-base pairs (USD/JPY, USD/CHF) up.
• You buy at the ask and sell at the bid; the gap is the spread.
• Cross rates are derived from the two dollar legs by multiplying or dividing.