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What Is XAU/USD Gold Trading? The Complete Guide
The essential vocabulary, then the first steps before you open a gold position.
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Read more →Lesson 02 of 8 · Forex Foundations
How a Currency Pair Is Quoted
16 min4 topics
Topic 1 of 4
By the end of this lesson
- Identify the base and quote currency in any pair
- Explain what you own and what you owe after a buy
- Read a bid and ask and say what the spread costs you
Before this lesson
A currency price is a ratio between two currencies, and almost every confusion a new trader has with forex comes from reading it as if it were the price of one thing.
Base and quote
Every pair is written the same way: base first, quote second. In EUR/USD the euro is the base and the dollar is the quote.
The number attached to it answers one question: how many units of the quote currency does one unit of the base cost? EUR/USD at 1.0800 means one euro costs 1.08 dollars. USD/JPY at 150.00 means one dollar costs 150 yen.
Good to know
Read the pair out loud as a sentence and it stops being ambiguous: "euro against dollar, one-oh-eight". The base is always the thing being priced.
The base is always one unit. That is why the number moves in such different ranges across pairs — 1.08 for EUR/USD, 150 for USD/JPY, 0.65 for AUD/USD. Those are not different kinds of price, only different currencies doing the pricing.
What buying EUR/USD actually does
Buying a pair means buying the base and selling the quote, in one action. Buy EUR/USD and you hold euros and owe dollars. Sell it and you hold dollars and owe euros.
You are never simply long or short in the way you might be long a share. You are always long one currency and short another at the same time, which is why a forex position can profit from either currency doing the work.
| You do this | You are long | You are short | You profit when |
|---|---|---|---|
| Buy EUR/USD | Euro | Dollar | The euro rises against the dollar |
| Sell EUR/USD | Dollar | Euro | The dollar rises against the euro |
| Buy USD/JPY | Dollar | Yen | The dollar rises against the yen |
This is also why "the dollar is strong today" can be read off several pairs at once. A strong dollar pushes EUR/USD and GBP/USD down, because the dollar is the quote in both, and pushes USD/JPY and USD/CHF up, because there it is the base.
Bid, ask and the spread between them
Your platform shows two prices, not one. The bid is what you can sell at. The ask is what you can buy at. The ask is always the higher of the two.
The gap between them is the spread, and it is the first cost of any trade. Buy at the ask and the position is immediately worth the bid, so a trade starts underwater by exactly the spread.
| Price | What it means | |
|---|---|---|
| Bid | 1.08000 | You can sell here |
| Ask | 1.08015 | You can buy here |
| Spread | 1.5 pips | What the round trip costs before anything moves |
Spreads are not fixed. They widen when fewer participants are quoting — overnight, at the weekly open, and in the seconds around a scheduled release. A spread quoted as "from 0.6 pips" is a best case, not a promise.
Note
Your stop loss and take profit are triggered against the price that would close the position, not the one that opened it. A long is closed at the bid, so a long is stopped out on the bid touching your level — the spread is working against you at both ends.
Majors, minors and crosses
Pairs get grouped by whether the US dollar is involved, and the grouping is a rough guide to how cheap and how orderly a pair is to trade.
Majors
The dollar against the other most-traded currencies: EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD. These carry the most activity, which usually means the tightest spreads and the least slippage.
Crosses
Pairs with no dollar in them, such as EUR/JPY or GBP/JPY. They are quoted directly, but a cross is effectively two dollar pairs stitched together, and its spread is usually wider because of it.
Minors and exotics
A major currency against a smaller one, such as USD/THB or USD/TRY. Wider spreads, thinner activity, larger gaps, and sometimes higher swap costs in one direction.
Caution
Start on majors. Not because exotics are forbidden, but because everything you are learning to measure — a stop distance, a cost, a normal-sized move — is harder to read when the spread is a moving target.
Key takeaways
- A pair is base against quote, and the price is how many quote units one base unit costs.
- Buying a pair buys the base and sells the quote in one action: you are always long one currency and short another.
- There are always two prices. The spread between them is the first cost of every trade, and it is not fixed.
- Majors carry the most activity and the tightest spreads; crosses and exotics cost more to trade.