In the foreign exchange market, a price quotation between two separate currencies is called a currency pair. The pair is derived from two components- The base, and the benchmark. The second currency is called the benchmark, and is the quote. The first currency in the pair is called the base currency.
When entering into a forex trade, You are effectively buying one currency, while simultaneously selling the other.
Based on whether you are buying or selling a currency pair, you are doing two opposing things. When going long(buying) a currency pair, you are buying the base and selling the quote. Conversely, when you are short(selling) a currency pair, you are selling the base and buying the quote. Its not possible to just buy or sell one currency in the forex market. One currency will always be paired up with another currency.
A currency pair is represented using 6 letters, separated by a slash. Three letters on one side of the slash and three letters on the other side. For example- GBP/USD, This would be referred to as the Great British Pound vs. the U.S. Dollar.
Its important to note that exotic currency pairs, such as emerging markets are considered to be less liquid and thus the spread between the bid and the ask are much wider. This could be considered a riskier trade.
Trading forex can be a very lucrative endeavor. Using a proper risk to reward ratio can protect your profits, as well as limit your loses. Taking loses are an inevitable part of all types of trading. This is why its important to employ proper risk management. We will cover risk management techniques in another post.
