A currency pair is the basic instrument of the foreign exchange (forex) market. Instead of trading a single currency on its own, forex traders always trade two currencies together: one currency is bought while the other is sold. The pair expresses the value of one currency in terms of another and tells you how much of the second currency is needed to buy one unit of the first. Understanding currency pairs, how they’re quoted, and what drives their movement is one of the first steps to learning forex trading.
Base currency and quote currency: the anatomy of a pair
Every currency pair is written with two three-letter currency codes. The first code is the base currency and the second is the quote (or counter) currency. For example, in EUR/USD the euro (EUR) is the base currency and the US dollar (USD) is the quote currency. If EUR/USD is priced at 1.2500, that means one euro can be exchanged for 1.25 US dollars.
The price of a pair moves because the market’s view of one currency’s strength relative to the other changes. If EUR/USD rises from 1.2500 to 1.2600, the euro has strengthened versus the dollar (or the dollar has weakened versus the euro). If it falls, the euro has weakened relative to the dollar.
How quotes, bids, asks and spreads work
A live forex quote usually shows two prices: the bid and the ask. The bid is the price at which you can sell the base currency, and the ask is the price at which you can buy it. The difference between them is the spread, which is a transaction cost built into the price.
For a simple example, if EUR/USD is quoted at 1.3607/1.3609, the spread is 0.0002 (or 2 pips). Pips are the standard unit of price movement in forex. For most pairs a pip is the fourth decimal place (0.0001); for pairs where the Japanese yen is the quote currency a pip is the second decimal place (0.01).
Putting that into a trade example, suppose you buy EUR/USD at 1.3010. You purchase euros while selling dollars. If the price later moves to 1.3110 and you close the trade, you have gained 100 pips. If you bought €10,000 at 1.3010 and closed at 1.3110, the gross profit would be roughly $100 (100 pips × $1 per pip for a €10,000 position). If the move went the other way, the result would be a loss.
Lot sizes, pip value and leverage: concrete numbers
Forex positions are typically expressed in lot sizes. A standard lot equals 100,000 units of the base currency, a mini lot is 10,000, and a micro lot is 1,000. The pip value depends on the pair and the trade size. Using EUR/USD as an example, trading one mini lot (10,000 euros) makes each pip worth about $1. In a USD/JPY trade, because of the different decimal convention, pip values are calculated differently, but the principle is the same: larger position sizes mean larger profit or loss per pip.
Many retail traders use leverage to control larger positions with a relatively small deposit (margin). Leverage magnifies both gains and losses, so it changes how quickly an account balance can rise or fall for a given price move.
Types of currency pairs
Currency pairs are often grouped by how commonly they are traded and by which currencies they contain. These groups matter because they affect liquidity, spreads and typical volatility.
Majors, crosses and exotics are the three broad categories. Majors always include the US dollar and tend to be the most liquid and cheapest to trade by spread. Crosses are pairs between major currencies that exclude the US dollar, and exotics pair a major currency with an emerging-market currency and typically have wider spreads and lower liquidity. Examples you will commonly see: EUR/USD, USD/JPY and GBP/USD are major pairs; EUR/GBP and AUD/JPY are crosses; USD/TRY and EUR/PLN are exotics.
What moves currency pairs
A currency pair’s price is driven by economic and market forces that affect demand and supply for the underlying currencies. Interest rate differences, central bank statements, inflation and employment data, geopolitical events and trade flows are among the primary fundamental drivers. Market sentiment and risk appetite also influence pairs: during times of market stress investors often move into perceived safe-haven currencies such as the Japanese yen or Swiss franc.
Technical factors—chart patterns, trendlines, support and resistance, and order flow—are commonly used by traders to time entries and exits. Liquidity and trading hours matter too: pairs are more active and spreads tighter during overlapping trading sessions, for example when London and New York are both open.
Choosing which pairs to trade: practical considerations
When deciding what to trade, most beginners benefit from focusing on one or two pairs to learn how they behave. Liquidity is useful because it generally means tighter spreads and more predictable fills. EUR/USD and USD/JPY are popular starting points because they are heavily traded and there is ample information about the economies behind them.
Crosses and exotics can offer opportunities but bring different challenges: crosses often have wider spreads than majors, and exotics can display sudden, large moves around local news or political events. Consider how each pair responds to news, whether its movements are correlated with commodities (for example AUD and NZD with commodity prices, CAD with oil) and what trading hours best match your routine.
Risks and caveats
Trading currency pairs carries real financial risk and is not suitable for everyone. Leverage can magnify losses as quickly as it magnifies gains; a small adverse move can wipe out a significant portion of an account if position sizing and risk controls are not used. Less liquid pairs and exotics tend to have wider spreads and can suffer from slippage, especially around major news releases or outside of peak trading hours.
Market-moving events such as central bank decisions, unexpected economic releases, geopolitical shocks or technical breaks can produce rapid price moves and gaps. Transaction costs, overnight financing (rollover) on leveraged positions, and the reliability of your broker’s execution should all be factored into any trading plan. This article is educational and not personalized financial advice; consider practising in a demo account and consult a qualified professional if you need tailored guidance.
Key Takeaways
- A currency pair quotes one currency against another; the first is the base currency and the second is the quote currency.
- Price movements are measured in pips; spread (ask minus bid) is the immediate trading cost.
- Pairs are grouped as majors, crosses and exotics; liquidity, volatility and spread vary between them.
- Trading forex involves significant risk, especially when using leverage; this is educational information, not personalized advice.
References
- https://www.babypips.com/learn/forex/buying-selling-currency-pairs
- https://www.home.saxo/learn/guides/forex/the-major-forex-pairs
- https://en.wikipedia.org/wiki/Currency_pair
- https://www.forex.com/en-us/trading-academy/courses/introduction-to-financial-markets/forex-trading/
- https://www.cmegroup.com/education/courses/introduction-to-fx/understanding-fx-quote-conventions.html
- https://www.home.saxo/learn/ways-to-trade/forex
- https://www.investopedia.com/terms/forex/f/foreign-currency-pairs.asp
- https://www.oanda.com/us-en/trading/instruments/