What Is A Currency Pair?

A currency pair refers to the two currencies that are involved in a foreign exchange trade. For example, if you want to buy the Japanese Yen using U.S. Dollars, you would look at the quoted price for the USD/JPY currency pair (USD = U.S. Dollar; JPY = Japanese Yen).

Basically, the currency pair you should be looking at depends on the currencies you wish to trade in.

What Is A Base Currency?

A base currency is the currency that is first mentioned in a currency pair. In the USD/JPY currency pair for example, the base currency is the USD. In the EUR/USD currency pair (EUR = Euros), the base currency is EUR.

The base currency is the currency with which the quoted price refers to. For example, the quote USD/JPY 110.00 means that one unit of the base currency (i.e. USD) is worth 110.00 JPY.

To clarify, here’s another example: EUR/USD 1.4600. This means that 1 unit of EUR is worth 1.4600 units of USD. To buy 1 EUR, you’ll need to trade in 1.4600 USD (i.e. sell 1.4600 USD).

What Are Bid And Ask Prices?

The base currency is traded at 2 different prices at any one time, depending on whether you want to buy or sell it. For example, if you want to sell the USD/JPY currency pair (i.e. sell the USD and buy JPY), you’ll receive 110.00 JPY. However, if you want to buy the USD/JPY pair, you may need to pay 110.03 JPY.

Notice how the buying price is higher than the selling price. This difference between the buy and sell price is known as the ‘spread’. If you first buy a currency pair and then immediately sell it, you’ll incur a loss equal to the spread.

The spread is what you pay to your broker as transaction fees.