Topic 1.1.1: Currency pairs
1. Introduction
In the Forex market, all trading happens through currency pairs. A currency pair shows the value of one currency relative to another. Understanding how pairs are structured is the foundation of Forex trading.
2. Structure of a Currency Pair
A currency pair is written as:
BASE CURRENCY / QUOTE CURRENCY
Example: EUR/USD
2.1 Base Currency
- The first currency in the pair.
- Represents the unit being bought or sold.
- In EUR/USD = 1.1000, EUR is the base.
2.2 Quote Currency
- The second currency in the pair.
- Represents the price of the base currency.
- In EUR/USD = 1.1000, the quote currency is USD.
3. How to Read a Currency Pair Quote
Example: EUR/USD = 1.1050
This means:
👉 1 Euro = 1.1050 US Dollars
If the price moves from 1.1050 to 1.1100,
👉 The Euro strengthened against the Dollar.
If the price moves from 1.1050 to 1.1000,
👉 The Euro weakened against the Dollar.
4. Types of Currency Pairs
Forex pairs are categorized into three main groups:
4.1 Major Pairs
- Most traded currency pairs in the world
- Always include the US Dollar (USD)
- High liquidity
- Tight spreads
- Lower volatility (usually)
Common major pairs:
| Pair | Name |
|---|---|
| EUR/USD | Euro vs US Dollar |
| GBP/USD | British Pound vs US Dollar |
| USD/JPY | US Dollar vs Japanese Yen |
| USD/CHF | US Dollar vs Swiss Franc |
| USD/CAD | US Dollar vs Canadian Dollar |
| AUD/USD | Australian Dollar vs US Dollar |
| NZD/USD | New Zealand Dollar vs US Dollar |
4.2 Minor (Cross) Pairs
- Do not include the US Dollar
- Still have good liquidity
- Moderate spreads
Examples:
| Pair | Name |
|---|---|
| EUR/GBP | Euro vs British Pound |
| EUR/JPY | Euro vs Japanese Yen |
| GBP/JPY | British Pound vs Japanese Yen |
| AUD/JPY | Australian Dollar vs Japanese Yen |
| EUR/AUD | Euro vs Australian Dollar |
4.3 Exotic Pairs
- Combine a major currency with an emerging or smaller economy
- Lowest liquidity
- Highest spreads
- Higher volatility
- Not recommended for beginners
Examples:
| Pair | Name |
|---|---|
| USD/TRY | US Dollar vs Turkish Lira |
| USD/ZAR | US Dollar vs South African Rand |
| USD/SEK | US Dollar vs Swedish Krona |
| EUR/TRY | Euro vs Turkish Lira |
| USD/MXN | US Dollar vs Mexican Peso |
5. Bid, Ask & Spread — How Brokers Quote Prices
Currency pair prices are shown in two values:
5.1 Bid Price
- Price at which you sell the base currency
- Lower of the two numbers
5.2 Ask Price
- Price at which you buy the base currency
- Higher of the two numbers
5.3 Spread
- Difference between ask and bid
- Represents broker’s fee
- Tight spreads = lower cost (majors)
- Wide spreads = higher cost (exotics)
Example Quote:
EUR/USD — 1.1050 / 1.1052
Spread = 2 pips
6. How Currency Pairs Move
Currency pair movement is driven by:
- Economic data (GDP, employment, CPI)
- Interest rate changes
- Geopolitical events
- Supply & demand
- Market sentiment
A pair moves because one currency strengthens or weakens relative to the other.
7. Direction of Trading (Buying vs Selling)
If you BUY a pair:
You expect the base currency to strengthen
or
the quote currency to weaken.
Example:
BUY EUR/USD = expecting EUR ↑ or USD ↓
If you SELL a pair:
You expect the base currency to weaken
or
the quote currency to strengthen.
Example:
SELL GBP/JPY = expecting GBP ↓ or JPY ↑
8. Correlation Between Currency Pairs
Some pairs move in the same direction (positive correlation)
while others move opposite (negative correlation).
Positive correlation examples:
- EUR/USD ↔ GBP/USD
- AUD/USD ↔ NZD/USD
Negative correlation examples:
- EUR/USD ↔ USD/CHF
- GBP/USD ↔ USD/JPY
Understanding correlation helps avoid over-risking multiple trades.
9. Key Takeaways (Summary)
- Currency pairs represent one currency’s value vs another
- Structured as Base/Quote
- Three categories: Majors, Minors, Exotics
- Price movement reflects strength or weakness
- Bid, ask & spread affect trading cost
- Correlations help with risk control