One of the main aspects of foreign exchange trading that makes it different from other stock and commodity markets is that all currencies are traded in pairs. The Euro and the United States dollar are the two most highly traded currencies in the world, and this currency pair is always quoted as "EUR/USD" with the euro quoted first. In this currency pair the euro is called the "base currency" and the dollar is called the "cross currency."
Some of the other most popular currencies are the Japanese Yen and the British Pound, and these currency pairs are always quoted as "USD/JPY" and "GBP/USD." These are not random pairings, but rather it has traditionally been for the ease of calculation that the stronger currency is the base currency and the weaker currency is the cross currency. The base currency always has a value of one, so when you see a price quote for the currency pair or you look at a price chart the value shown is how many units of the cross currency it takes to equal one unit of the base currency.
When we see a currency pair such as USD/JPY with a value of 115.00, this is saying that one dollar equals 115 yen. Understanding the relationship between the base currency and the cross currency and learning to read currency pair price quotes in this way is essential when you want to make money in the forex market. A good exercise that can help you to better understand this relationship with currency pairs is to pick up your daily newspaper and turn to the financial section, where there will likely be a daily updated currency table.
The currency table that is published in most major newspapers will list all of the major world currencies vertically and horizontally, with a diagonal line of blank spots where each currency lines up with itself. When you look at this table you will find the exchange rate for the dollar in terms of the euro, but this will literally be quoted as USD/EUR instead of the traditional pairing used on nearly all forex trading platforms of EUR/USD. If you had an open trade on this currency pair and wanted to look at the newspaper to see if your position gained or lost value, seeing the exchange rate reversed might be very confusing to you.
So if you have a price quote of "0.7407″ for the USD/EUR, what you will want to do is take 1 divided by 0.7407 so that you can reverse the currency pair and get the normal EUR/USD price quote which would be 1.3500. What this example tells you is that this exchange rate value can be read as "one euro equals $1.35″ or "one dollar equals 0.74 euros." From this example it is easy to understand why the currency that historically has a higher value is always quoted as the base currency, because it makes the calculations much simpler.
If this type of calculation seems complicated to you, you can simply remember that if you put the number 1 in the numerator place (top) and the exchange rate in the denominator place (bottom), it will reverse the currency pair. It is very important for a forex trader to understand these basic relationships with currencies and exchange rates, and once you get some practice and experience (even if it is only trading a demo account) it will become second nature to perform the simple calculations that affect your trading.
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