The circle of fifths is a magical wheel that describes the relationship between chords in a cunning way. I'm going to talk through the fifths so that you understand how it works, and what makes it so amazing.
What it Describes
The Circle of Fifths is named as such because each note, moving clockwise around the circle, is a fifth apart from one another. If you count from C, to the note next to it, G, you'll see there are five whole steps between them: C, D, E, F, G. The same as true all the way around the circle.
Because of the nature of music, moving the other direction, (counter-clockwise/anti-clockwise), each note is a fourth apart from the one next to it. Start at C, and go to F: C, D, E, F!
Why Is this Important?
Every scale has three major chords. They are chord ONE, (the tonic), chord FOUR, and chord FIVE. In the key of C, this would be the C Major chord, the F major chord, and the G major chord. F is a perfect fourth from C, and G is a perfect fifth from C. Notice on the circle above? They are the chords directly to the left and right of C!
This is true all around the circle. If you want to know the perfect fourth in the key of E, look to the left of the E chord. It is an A. The perfect fifth is to the right, a B. These three chords, E, A, and B, are the three major chords in the key of E.
How to Use This
When you play an instrument that can chord, such as a piano or guitar, often the trick is to know which chords work with which key. But this is never confusing if you've got a circle of fifths in front of you. The chords are all in the same quadrant (a quarter of the circle) as the key name.
How about an example. If we are playing in the key of C, the major chords we need are C, F, and G. The minor chords we will sometimes need are Dm, Em, and Am. Take a look for these chords right now on the circle above. Notice they are in the same quarter of the circle?
Ninety-five per cent of the time, these are the only chords you will use in any song. Sometimes you may use Bb, and D as chords in the key of C, but they are right next to the quadrant.
Almost NEVER will you use a chord on the opposite side of the quadrant.
Transposing Made Simple
Let's say you were playing a song in the key of C, and someone asked you to lower it to Bb. Take a quick look at the circle, and you'll see how this can easily be done.
The major chords are no longer C, F, and G, but are Bb, Eb, and F. The minor chords are no longer Dm, Em, and Am, they are now Cm, Dm, and Gm!
Flats and Sharps Too!
You can see that as you move clockwise around the circle, you add a sharp to the key. As you move anti-clockwise around the circle, you add a flat!
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