Base and quote currency: how to read a currency pair and go long or short

Every forex price is a comparison between two currencies. Once you know which one is being priced and which one does the pricing, buying, selling, profit and loss all fall into place. The prices below are hypothetical.

Base and quote

In a quote such as EUR/USD 1.1050:

• EUR is the base currency, the one being priced. There is always one unit of it.
• USD is the quote currency, the one used to price it.
• 1.1050 means one euro costs 1.1050 US dollars.

In USD/JPY 147.20, the dollar is the base: one US dollar costs 147.20 yen.

The order follows market convention, not the alphabet. The euro comes first against every other currency, then sterling, then the Australian and New Zealand dollars, then the US dollar. That's why traders quote GBP/USD, AUD/USD and NZD/USD, but USD/JPY, USD/CAD and USD/CHF.

Buying and selling a pair

• Buying (going long) EUR/USD means buying euros and selling dollars. You profit if the euro strengthens against the dollar and the price rises.
• Selling (going short) EUR/USD means selling euros and buying dollars. You profit if the price falls.

You don't need to own euros to sell EUR/USD. In a CFD or spot forex account, a short position is as easy to open as a long one.

Bid and ask

Your platform shows two prices. The bid is the price at which you can sell the base currency, and the ask is the price at which you can buy it. The ask is always higher, and the gap between them is the spread (bid, ask and slippage).

Profit and loss start in the quote currency

A position's result is calculated first in the quote currency:

• Buy 10,000 euros of EUR/USD at 1.1050 and sell at 1.1100. The price rose 0.0050, so the profit is 10,000 × 0.0050 = 50 US dollars.
• Sell 10,000 dollars of USD/JPY at 147.20 and buy back at 146.70. The price fell 0.50, so the profit is 10,000 × 0.50 = 5,000 yen, which the broker converts into your account currency.

That conversion is why pip values differ between pairs and depend on your account currency.

Units and lots

A position of 10,000 units of the base currency is a mini lot, or 0.10 lots; a standard lot is 100,000 units (lot sizes explained). For prices between two currencies that don't include the dollar, see cross rates.