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Assume the trader's assets are in USD.

The first currency is base, which is bought after selling the quote.

Like EUR/USD. If my understanding is correct, wouldn't that be selling my USD in order to buy EUR and hope it will increase in value for profit?

So why is the JPY and USD pair displayed as USD/JPY? Wouldn't that mean I am selling JPY which I don't have for USD?

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  • The investor can buy or sell the EUR/USD currency pair. It's an exchange-rate contract where the exchange-rate is relative to a position size.
    – S Spring
    Nov 23 '21 at 1:14
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It's just a convention:

Currency Pair Quotation Conventions

The base currency in a particular currency pair are often determined by their importance in relation to other currencies.

For example, the Euro is generally considered the most dominant base currency, followed by the Pound Sterling, the Australian Dollar and the New Zealand Dollar. All of these serve as the base currency in their currency pairs involving the U.S. Dollar, and they would be written in currency codes like this: EUR/USD.

The U.S. Dollar then dominates as the base currency in virtually all other currency pairs, including against the Japanese Yen, the Canadian Dollar, and the Swiss Franc, as well as in currency pairs against the exotic currencies. These currency pairs would generally be written like this: USD/JPY.

So a USD/JPY quote means "buying USD in JPY", meaning you are paying an equivalent amount of JPY to get USD.

If you want to trade the other way around, meaning you want to pay USD and get JPY, just invert the FX rate, so a rate of 20 becomes 0.05. Note that you should also invert the bid/ask, meaning you would invert the USD/JPY bid if you are looking to buy JPY with USD.

If you get confused about the bid/ask, remember that you always pay the higher amount and sell for the lower amount.

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