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Trading 101: Introduction to Currency Pairs, Part 1

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Trading 101: Introduction to Currency Pairs, Part 1

Introduction

This article was posted on Friday, 19:34, UTC.

Trading fiat and crypto-currencies involves an awful lot of simple and not so simple technical terms to learn. One of the most basic ones is the term “currency-pair” which comes from the fact that you always compare (and trade) a currency to another when you are talking about the “price” of it. That’s right, there is no such thing as trading the Dollar or Bitcoin or ETH in itself (let’s forget about the currency indices and more complex assets for now). You can, of course, be a holder of Dollars, Bitcoins, or ETH tokens, but to value and trade them, you need to have something to compare it to.

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Now, this when it can get complicated and confusing for beginner investors and traders, as sometimes different people mean different things when they talk about the price of a currency. We will take a look at the basic conventions concerning both traditional and cryptocurrencies, and how to interpret the various currency pairs. For those who are already familiar with forex trading and international exchange rates, this article might seem too simplistic, but for those who are new to the field, it’s absolutely essential to understand the basic terms.

The Fiat Convention

Long-term chart of the EUR/USD, the most traded currency pair

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In the fiat world, the most commonly used base currency is the US Dollar, the largest global reserve currency. It’s not only widely used to process international transactions but it’s also the guideline for valuing all the different international currencies. So, when someone says that the Euro is getting stronger, it usually means that it’s appreciating compared to the USD.

Now, this where it makes sense to introduce the term of currency pairs, as the Euro’s value against the Dollar is commonly referred to as the EUR/USD pair. The basic format for currency pairs is always this, a ratio of the three letter abbreviation of the currencies involved. We have to add that the major currencies are valued on several pairs against each other, as is the case with the Euro and the Great British Pound (EUR/GBP pair), the Japanese Yen (EUR/JPY pair) and so on.

Also, in some regions of the world, where another currency is dominant, that currency might serve as the common base for the local currency pairs (like the Euro in Europe). The convention usually involves only one way of calculating a pair, although it makes total sense to talk about the USD/EUR pair (and all the other inverse pairs) as well.

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Conventions in The Crypto World

The cryptocurrency segment is growing exponentially, both in the capital involved and the number of currencies that are present. The valuing convention is much more fluid here than in the traditional Fiat world, which could lead to severe practical problems.

The basic currency of the crypto-world is Bitcoin, as most of the altcoins are valued in BTC-terms, although Ethereum is rapidly gaining ground, while the inherited Dollar-pairs are also widely used. We wouldn’t cast our vote for a future convention here, especially that having more pairs to trade and value coins is better for traders and investors alike. That said, we suggest always using pairs when discussing currencies, as it could save you and others from a lot of troubles.

Relative Performance

The relative performance of the ETH/USD, the BTC/USD and the ETH/BTC pairs so far in 2017

The key element of using pairs in trading is to understand relative performance. As Bitcoin has exploded in value against the USD, altcoins generally followed it higher, and what’s more a lot of them (think Ethereum) have gained significant ground even on Bitcoin. Translating that to the language of pairs and the example of the ETH token, the ETH/USD pair has stellar gains this year and even the ETH/BTC pair is up several 100%s in 2017.

To be clear Ethereum provided way more profits for those who held it against the Dollar (or want to use it the fiat world), as Bitcoin itself surged compared to the USD. But, that doesn’t mean that holding ETH/BTC is a bad idea, just you have to know that you basically remove the Dollar (so the fiat world) from the equation, so the profits you bank will be entirely coming from Ethereum’s (or any other coins) relative performance compared to Bitcoin.

In the second part of the introduction, we will show you how to use currency pairs to your advantage in investing and trading. And if there is anything that’s not clear, please don’t hesitate and put it down in the comments below, so we can clear all doubts there or in the next article.

Important: Never invest money you can't afford to lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here.



Feedback or Requests?

Mate Cser

Mate Cser

Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.

Comments
  • user

    AUTHOR wizdumb

    Posted on 9:31 am June 17, 2017.

    Kinda like comparing cars running at different speed.

  • user

    AUTHOR RH2302

    Posted on 11:14 am June 17, 2017.

    Very welcome lessons. I’m looking forward to the next post!

  • user

    AUTHOR JamesBaund

    Posted on 2:53 pm June 17, 2017.

    For a newbie is it better to hold them vs btc or use? Seeing those returns on eth makes me think having them paired to use is better

  • user

    AUTHOR JamesBaund

    Posted on 2:55 pm June 17, 2017.

    So you don’t really own say 20 ETH coins. You own them paired vs btc? Or you still own them but the price you see is based on that pair? Just trying to understand crypto

    • user

      AUTHOR Mate Cser

      Posted on 5:08 pm June 17, 2017.

      No, you can hold ETH coins, sure, but if you trade it on an exchange you are trading it compared to BTC or USD, or some other fiat currency. Or if you want to value it you will say it is worth say $7000 or 3BTC. Hope this helps.

  • user

    AUTHOR Iggy1994

    Posted on 3:32 pm June 17, 2017.

    Is trading ETH/BTC vs ETH/USDT different? because it all is the same price when converted, a bit confused.

    • user

      AUTHOR Mate Cser

      Posted on 5:11 pm June 17, 2017.

      The trading profits will be different slightly and in the long run, they add up.

  • user

    AUTHOR 4feichu

    Posted on 8:13 pm June 23, 2017.

    excellent write up for newbies, keep up the good work!

  • View Comments (8) ...
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