The whole trading activity is based on the right evaluation of currency pairs. First of let’s try to understand the essence of a currency pair and how this pair is formed.
Actually it’s a quotation which features two different currencies. One currency is being quoted in terms of the other. For example, the pair USD/JPY indicates two currencies: the U.S. Dollar and the Japanese Yen.
The next question that is likely to arise here is: “How does the procedure of quotation take place. Thus the first currency in a currency pair is accepted as “base currency”, and the second one as “quote currency”.
In the above mentioned example USD is the base currency and JPY stands for quote currency. In order to understand the scheme of that base and quote currencies you can analyze in the following way. Consider that the value of the base currency is always 1. It would be much easier to ask yourself “How many units of quote currency can I buy with 1 unit of base currency?” To exemplify this by the mentioned example, a quote of USD/JPY 109.48 means that one U.S. dollar is equal to 109.48 Japanese yen.
What you should do here is to buy a currency pair if you think the base currency will increase with respect to the quote currency, or that the corresponding exchange rate will rise. In the same way you should sell the currency pair speculating that the base currency will decrease as compared to the quote currency or the quote currency will increase with regards to the base currency.
You can simultaneously buy one currency and sell another as most Forex traders do. Therefore, while buying a currency pair, you buy the base currency and sell the quote currency. The price at which you buy is called “bid” and the price at which you sell is accepted to be called “ask”. One important thing for you to know is that the bid price is always lower than the ask price. The difference between the bid and the ask prices is called spread.