What is a Currency Pair in Forex Trading?
Quick Answer: A currency pair represents the exchange rate between two currencies (e.g., EUR/USD). The first currency is the base, the second is the quote. You buy one and sell the other simultaneously, speculating on their relative value change.
Understanding Currency Pairs in Forex
Unlike stocks where you buy a single company, forex trading always involves currency pairs. You're simultaneously buying one currency and selling another, speculating on their relative value change.
Anatomy of a Currency Pair
Every pair has two components:
- Base currency (first): The currency you're buying or selling
- Quote currency (second): The currency used to price the base
Example: EUR/USD = 1.0850
- EUR is the base currency
- USD is the quote currency
- It costs $1.0850 to buy €1
- If you buy EUR/USD, you're buying Euros and selling Dollars
Reading Currency Pair Quotes
When the price goes up or down:
- EUR/USD rises 1.0850 → 1.0900: Euro strengthened against Dollar
- EUR/USD falls 1.0850 → 1.0800: Euro weakened against Dollar
- GBP/JPY rises 185.00 → 186.00: Pound strengthened against Yen
Categories of Currency Pairs
| Category | Definition | Examples |
|---|---|---|
| Majors | Include USD, highest volume | EUR/USD, GBP/USD, USD/JPY |
| Minors (Crosses) | No USD, still liquid | EUR/GBP, GBP/JPY, EUR/CHF |
| Exotics | Emerging market currencies | USD/TRY, EUR/ZAR, USD/MXN |
Practical Example
You believe the US economy will outperform Europe. You sell EUR/USD at 1.0850. The pair falls to 1.0750. Since you sold Euros (base currency), you profit when the pair drops. Your 100-pip profit on a standard lot = $1,000. You were correct - the Dollar strengthened relative to the Euro, and your prediction on the currency pair paid off.
Related Terms
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