A currency pair is a price quote of the exchange rate for two different currencies traded in the foreign exchange market.
Forex trading is the simultaneous buying of one currency and selling another. When you trade in the forex market, you buy or sell in currency pairs. Each currency in the pair is listed as a three-letter code.
The first two letters identify the name of the country and the third letter identifies the name of that country’s currency, usually the first letter of the currency’s name.
For example, USD stands for the US dollar and CAD for the Canadian dollar In the USD/CAD pair, you are buying the U.S. dollar by selling the Canadian dollar.
The first currency listed in a currency pair is called the base currency, and the second currency is called the quote currency. The quote currency is also known as the “counter currency”.
Currency pairs compare the value of one currency to another. It indicates how much of the quote currency is needed to purchase one unit of the base currency. The price of a currency pair is how much one unit of the base currency is worth in the quote currency.
For example, for the currency “EUR/USD”, EUR is the base currency and USD is the quote currency.
If EUR/USD is trading at 1.0950, then one euro is worth 1.0950 U.S. dollars. If the euro appreciates against the dollar, then a single euro will be worth more dollars and the pair’s price will rise. If the euro depreciates against the dollar, the pair’s price will fall.
If you think that the base currency in a pair is likely to strengthen against the quote currency, you can enter a long position (“buy the pair”). If you think it will weaken, you can enter a short(“sell the pair”).
Vincent Nyagaka is a Professional Trader, Analyst &. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Checkout Vincent’s Professional Trading Course here.