2.1 - The Currency Pair Necessities

So far we’ve introduced you to the currency trading basics particularly from Pipster’s perspective.
If you’ve just started using the app, or you don’t know what Forex is, you’re clueless about crypto or need to get a further handle on how CFDs work – then head to chapter one first.

In this section, we’re going to take a closer look at some of the underlying concepts, mechanisms and techniques in day trading. Starting with currency pairs.

For speed and screen space, currencies are represented by three capital letters. This currency code is used across the markets. For the US Dollar it’s USD, for the Euro it’s EUR, for the Russian Ruble is RUB, THB for Thai Baht, and so on.

A currency pair is exactly what it sounds like: a pair of currencies – priced one against the other. Forex trading takes place using these pairs, allowing you to buy and sell one currency against another for profit or loss over time.

Take for example EUR/USD – this is the most commonly traded pair on the forex market. When represented in this way, the value shown – either before or below this code – will indicate the current amount of US Dollars you can buy with exactly one Euro. When quoting pairs we refer to the first currency as the base currency [EUR/USD] and the second as the quote currency [EUR/USD].

Buy-orders, going long, or taking a ‘long position’ are all terms for essentially ‘buying in’ trade. You buy because you speculate that the base currency value will increase in value against the quote currency. Essentially you’re buying into something you think will be worth more by the time you’re ready to ‘close-out’ and sell it back.

Selling-orders, shorting, going short, trading on the ‘right-side’ are some of the ways people describe ‘Selling’. This enables you to make a profit when the base currency loses value after you make a sell trade. It can be counter-intuitive to beginners because you don’t already own what you’re selling.

When you choose to short-sell you effectively request that your broker sells the chosen product on your behalf. If the value of the product does indeed go down the position is closed and the original asset is bought-back by your broker, for less – resulting in a profit. Should the rate have gone up, it would have cost your broker more to close the position and buy back what they first held – so this would mean a loss to you.

If you’re wondering how this is possible – the short answer is CFDs. For a longer explanation watch our earlier chapter ‘An ABC on CFDs’.

Another little difference to note with cryptocurrencies is that they are all priced against the US dollar (USD) in trading. For example, when you see a price for Bitcoin, the pair is shown as BTCUSD with Bitcoin being the base currency. The amount of USD you can buy with one bitcoin is the value shown as the price.

Now you will notice that value differs between what you can buy or sell a currency. We’re going to tackle this in the next section.

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