What are trading pairs and why are they important?

What is a trading pair?

A trading pair, also known as a trading pair, is a combination of two assets that are traded against each other. These assets can be fiat currencies, but also cryptocurrencies, commodities, and other financial instruments. A trading pair shows which asset you are buying and what you are exchanging it for.

A trading pair consists of the ‘base currency’ and the ‘quote currency’. The base currency is the asset you trade: the one you buy or sell. The quote currency is the asset you exchange with.

The base currency is always shown on the left, followed by the quote currency, like this:
Base currency / quote currency

In practice, trading pairs are displayed as tickers of the assets you want to trade.

The price of a trading pair always indicates how much of the quote currency is needed to buy one unit of the base currency.

Example:

Suppose you want to exchange 100 US dollars for euros. You can look at the trading pair USD/EUR.

If the rate is USD/EUR = 0.87, this means you get €0.87 for 1 dollar. If you have 100 dollars, you will receive €87.

So: a trading pair does not indicate whether you are buying or selling, but shows how the value of the base currency relates to the quote currency.

Key Takeaways

• A trading pair is a combination of two assets that are traded against each other and shows which asset you are buying and what you are paying with
• The base currency is on the left (what you trade) and the quote currency is on the right (what the price is expressed in)
• The price of a trading pair shows how much of the quote currency is needed to buy one unit of the base currency
• More trading pairs and higher liquidity provide more flexibility, lower costs, and better trading opportunities

How does a trading pair work?

With a trading pair, you exchange two types of value-based assets. This means that, for example, through a trading platform or a broker, you exchange one type of asset (such as euros) for another type of asset (such as Bitcoin) at an exchange rate. A trading pair makes this exchange possible.

In the example of exchanging euros for Bitcoin, the trading pair looks like this: BTC/EUR. The price shows how many euros you need for one Bitcoin. If the Bitcoin price is €60,000, you pay €60,000 for 1 BTC.

If you want to sell Bitcoin for euros, you use the same trading pair (BTC/EUR), but execute the opposite transaction. In that case, you exchange Bitcoin and receive euros.

Trading in a specific trading pair often takes place through an order book. Within an order book, all buy and sell orders are collected. This also means that the price is determined by supply and demand and constantly changes. At any moment, there are people who want to buy and people who want to sell. When they meet at a certain price, a trade is executed.

Why are trading pairs important and useful?

Trading pairs are used to express the value of an asset relative to another asset and to enable trading between two assets. Without trading pairs, you would not have a clear way to exchange assets or determine their value.

You can only buy an asset if there is another asset to pay with. A trading pair defines this relationship and ensures that buyers and sellers can find each other.

In addition, trading pairs provide context for the value of an asset and how it performs relative to other assets. Take, for example, the value of Ethereum compared to Bitcoin. Within the ETH/BTC trading pair, you can see how much 1 ETH is worth in Bitcoin, for example 0.03 BTC.

If the price of ETH rises relative to BTC to 0.032 BTC, this means that Ethereum has increased in value compared to Bitcoin. However, this says nothing about the value of ETH compared to other assets, such as euros or gold. It is possible that ETH rises against BTC while simultaneously falling against EUR or the price of gold.

You can see how the price relates to another asset in price charts. These show not only the current price but also how the price has developed over time.

Why is liquidity important in trading pairs?

Liquidity plays an important role in trading pairs because it ensures that an asset can be traded for another asset. If liquidity is low, it may take longer to exchange your assets, or it may only be possible at a less favorable exchange rate.

In other words, liquidity refers to how easily you can buy or sell an asset without significantly affecting its price.

A trading pair with high liquidity means there are many active buyers and sellers. This allows you to trade quickly at a fair price. With low liquidity, this becomes more difficult and prices can fluctuate more rapidly. In addition, you often pay larger spreads or higher slippage when liquidity is low. These are extra costs that arise because fewer buyers and sellers are available.

Supply and demand are important here. If there is strong demand for both assets, liquidity is usually higher. If you trade a smaller and less popular asset, liquidity is often much lower and you are more likely to pay higher slippage or spread costs.

This affects your costs, the speed of trading, and the level of risk you take.

Why do multiple trading pairs help when trading?

The more trading pairs available, the more options and control you have as a trader. You can access the same asset in multiple ways. Instead of being limited to one route, you can choose the most efficient option, such as directly via fiat (for example ETH/EUR) or indirectly via another asset (for example EUR via BTC to ETH).

It also affects the transaction costs you have to pay. For example, if you have BTC but want to buy SHIB and there is no BTC/SHIB pair available, you will need to take an alternative route. For instance, you could first exchange your BTC for EUR via the BTC/EUR trading pair and then trade those euros for SHIB via the SHIB/EUR trading pair. That means if you trade via centralized platforms, you often have two transactions and therefore also incur fees twice. The more trading pairs available, the smaller the chance you have to take such detours. At Finst, you can trade any crypto for another crypto, making it highly flexible and cost-efficient for traders.

Taking it a step further, multiple trading pairs can help you find better prices. Due to differences in liquidity and supply and demand, the same asset may have slightly different prices depending on the route. This opens the door to additional strategies, such as arbitrage trading and trading based on relative strength between assets.

Finally, multiple trading pairs give you a more complete view of the market. Instead of looking at just one price, you can see how assets relate to each other, and that is often where the most interesting insights and opportunities arise.

Final thoughts

Trading pairs form the foundation of every financial market where assets are traded. They determine not only how you buy or sell an asset, but more importantly how value is expressed and compared between different assets. By understanding how trading pairs work, you gain better insight into price movements, market structure, and the relationships between markets.

In addition, factors such as liquidity and the number of available trading pairs play an important role in how efficiently you can trade. More trading pairs offer flexibility, better pricing options, and additional strategic opportunities, while high liquidity ensures lower costs and faster trade execution.