Currency Pairs: What They Are and How They Work

In the foreign exchange (forex) market, a currency pair represents the relative value of one currency compared to another. Every forex trade involves a pair of currencies: the base currency and the quote (or counter) currency. The base is the currency being bought or sold, and the quote indicates how much of it is needed to buy one unit of the base.

For example, in EUR/USD = 1.2500, 1 euro equals 1.25 US dollars. If the quote rises, the euro strengthens; if it falls, the dollar gains value.

Currency Pair Notation and Structure

Currency pairs are written using ISO 4217 codes, which are three-letter abbreviations for currencies. The general format is:

Types of Currency Pairs

Currency pairs are grouped into three main categories:

1. Major Currency Pairs

These pairs all involve the US dollar and one of the worlds most traded currencies. They offer high liquidity, low spreads, and tight execution.

2. Minor Currency Pairs (Crosses)

Minors do not include the US dollar but involve other major currencies. Examples:

• EUR/GBP
• GBP/JPY
• AUD/CHF

These pairs have moderate liquidity and spreads.

3. Exotic Currency Pairs

These involve one major currency and one from an emerging market.

While exotic pairs offer high reward potential, they come with wider spreads and higher trading risks.

How Currency Pairs Work in Trading

Forex trading is the act of speculating on whether the base currency will strengthen or weaken relative to the quote currency.

• Go long (buy): Expect the base currency to rise in value
• Go short (sell): Expect the base currency to fall in value

Lot Sizes in Forex

Most brokers offer leverage, allowing traders to control larger positions with smaller capital, but leverage increases both potential profit and risk.

Understanding Pips and Spreads

• A pip (percentage in point) is the smallest change in a currency pair's value.
• For most pairs, 1 pip = 0.0001; for JPY pairs, 1 pip = 0.01.
• Spread is the difference between the bid price (buy) and ask price (sell).

Lower spreads mean lower trading costs, making major pairs more attractive for frequent traders.

Why Currency Pairs Matter

Currency pairs reflect economic strength, geopolitical stability, and monetary policy. They serve as the foundation for:

• Hedging international exposure
• Speculating on macroeconomic trends
• Global financial analysis

Whether you're trading majors for liquidity or exploring exotics for higher returns, understanding how currency pairs function is essential for participating in the forex market.

⚠ Risk Note: Forex trading involves significant risk and is not suitable for all investors. It's essential to understand the instruments, risks, and trading costs before participating. Start with a demo account to build experience.

More Information

Base Currency Explained: A Beginner's Guide

What Is a Quote Currency? Complete Explanation for Beginners

What Are Cross-Currency Pairs? Beginner’s Forex Guide