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When you trade forex, you’re buying or selling a currency pair – such as EUR/USD, GBP/USD or USD/JPY. Let’s take a closer look at the anatomy of forex pairs.
The first currency in a pair is known as the base currency. The second is known as the quote currency (or the counter currency). The rate at which the pair is trading tells you how much of the quote you’ll need to buy a single unit of the base.
Say, for example, that EUR/USD is trading at 1.3010. The euro is the base, and the US dollar is the quote – meaning it costs 1.3010 dollars to buy a single euro.
Forex traders look to profit from fluctuations in the exchange rates of currency pairs. So, if you think that the US dollar is going to strengthen against the euro, you might buy EUR/USD to capitalize on the move.
However, if EUR/USD had dropped down to 1.2910, your position would have a $100 loss
But you don’t only have to buy currency pairs. If you think that the base currency is going to fall against the counter, you can sell the pair instead.
When you sell forex, you’re buying the counter by selling the base currency.
This gives you a position that earns a profit when your chosen pair falls in value, also known as a short position. It’s one reason why trading forex is so popular – there are no restrictions or extra charges associated with going short.
However, if EUR/USD had risen instead, you would sustain a loss
A pip is a single point of movement in a forex pair. In most FX pairs, a pip is equivalent to a single-digit move in the fourth decimal point of a currency pair’s price. If EUR/USD moves from 1.0717 to 1.0718, it has moved up one pip.
One important exception to this rule is currency pairs where the Japanese yen (JPY) is the quote currency. Here, a pip is equivalent to a single-digit move in the second decimal point. If USD/JPY moves from 110.08 to 110.03, it has moved down five pips.
This is because the yen is worth comparatively little to other major currencies.
You’ll often see an extra fifth digit after the pip on a forex quote. These are referred to as fractional pips (or pipettes). Sometimes, they’ll be written in superscript (smaller font size) to differentiate them from pips.
A pip is worth 0.0001 (or 0.01%) of a single unit of the quote currency. That means you have to trade 10,000 units of the base currency to earn one unit of the quote for each pip movement. The amount of the base currency you trade is known as your lot size.
To earn $1 for every pip that EUR/USD moves, for example, you’d have to trade the equivalent of €10,000.
Remember that a pip is worth 0.01 (or 1%) of the base currency when the quote is the yen? If you traded $10,000 of USD/JPY, you’d earn or lose ¥100 for each pip that USD/JPY moves.
If USD/JPY is trading at 110.00, then that’s the equivalent of $0.91 ((1 pip/110.00) x ($10,000)).
As you’ve probably noticed, a pip doesn’t have much value in real terms. That’s why most individual traders use leverage to take advantage of the constant fluctuations in forex prices.
Leverage means you’re only required to put up a small amount of money (known as margin) to control a much larger amount. It enables retail traders to open short-term forex positions without locking away thousands in capital. However, it magnifies both your profits and your losses – so requires careful risk management.
Leverage has been covered in more detail in our Introduction to leverage in trading course lesson.
Currency pairs are traditionally divided into three groups related to their popularity and liquidity: majors, minors and exotics.
Majors are the most actively traded currencies, constituting about 85% of the total FX volume. They typically cost less to trade than minor currency pairs, because they are bought and sold so much.
The major pairs are:
EUR/USD, though, is the biggest by far – some 28% of all forex trades are on euro-dollar alone. The major currency pairs all include the US dollar (USD).
Currency pair |
Shorthand |
Nickname |
Euro vs US Dollar |
EUR/USD |
Euro-dollar |
US Dollar vs Japanese Yen |
USD/JPY |
Dollar-yen |
British Pound vs US Dollar |
GBP/USD |
Cable |
Australian Dollar vs US Dollar |
AUD/USD |
Aussie |
US Dollar vs Swiss Franc |
USD/CHF |
Swissy |
US Dollar vs Canadian Dollar |
USD/CAD |
Loonie |
While the major currency pairs make up most of the market, you shouldn’t ignore the minors – also referred to as cross currency pairs. These are made up of all the other combinations of major markets, such as EUR/JPY, AUD/NZD and EUR/GBP.
Spreads for minor currency pairs are often wider because there are fewer people buying and selling them in the market at any given time, resulting in less liquidity.
Currency pair |
Shorthand |
Nickname |
Euro vs Japanese Yen |
EUR/JPY |
Euro-Yen |
Australian Dollar vs New Zealand Dollar |
AUD/NZD |
Aussie-Kiwi |
Exotic currency pairs feature less popular currencies and are traded less frequently or in lower volumes. Due to these low volumes, exotics are illiquid and can be more expensive to trade. Many view exotic currency pairs as having higher risk profiles compared to commonly traded currencies.
Examples of exotic pairs include AUD/PLN, USD/CZK, GBP/DKK and EUR/TRY.
Currency pair |
Shorthand |
Australian Dollar vs Polish Zloty |
AUD/PLN |
US Dollar vs Czech Koruna |
USD/CZK |
British Pound vs Danish Krone |
GBP/DKK |
Euro vs Turkish Lira |
EUR/TRY |
A good rule of thumb if you’re new to forex is to focus on one or two currency pairs. Generally, traders will choose to trade EUR/USD, USD/CAD or GBP/USD because there is so much information and resources available about the underlying economies involved.
Lots of different factors can affect an individual currency pair’s price on any given day. Some common examples include:
Economic data |
Central banks |
Politics |
Currencies tend to reflect the economic health of their parent nation. So critical economic data – such as inflation, unemployment numbers, foreign trade or payroll numbers – can often result in forex volatility. | Central banks can have a big influence over the performance of currencies, for example by changing interest rates or printing more money. They may also buy and sell their currency to keep it trading within a certain level. | Increasingly, political uncertainty can drive currency markets. The US dollar, for example, has traditionally been seen as a safe-haven currency – so its price may rise during troubled times.
Alternatively, something as banal as a speech by a finance minister can have a big impact on a currency. |
Forex price drivers are covered in more detail in our What moves currency markets course lesson.
Now that you know a little more about forex, we can take a closer look at how to make your first trade. If you have a FOREX.com demo account, you can follow these steps to open a practice trade. If you haven’t yet, opening one takes seconds and costs nothing. Open your demo account.
Or if you’d like to try out trading on live markets, open a live account.
Most new traders will focus one of the three headline majors – EUR/USD, USD/CAD and GBP/USD – but you can trade any currency pair that we have available as long as you have enough virtual funds in your demo.
Search for ‘EUR/USD’ in the demo platform.
This is how you decide whether to go long or short, as well as what strategy to take. You might look at current and historical charts, monitor the news for economic announcements or consider applying a few technical indicators.
Take a look at recent news on EUR/USD. Are there any clues to its future price action?
We’ll take a closer look at technical and fundamental analysis later on.
Like most financial markets, forex pairs will have two prices listed on their quote.
The first is the price at which you can sell the currency pair. The second is the price at which you can buy the currency pair. The difference between them is called the spread, which is the amount that a dealer charges for making the trade. Spreads will vary among dealers. FOREX.com offers competitive spreads on the wide range of currency pairs offered. View our live spreads.
Take a look at the EUR/USD trade ticket by clicking on its market name.
The size of your trade determines how much of the base currency you are buying or selling – and how much you’ll make or lose for each pip that the pair moves.
Choose a buy position if you believe that the value of the base currency will rise compared to the quote currency. Choose a sell position if you believe that the value of the base currency will fall compared to the quote currency.
Select a ‘buy trade’ with a quantity of 1000, and hit ‘Place trade’ to open your position.
To close a forex trade, you trade in the opposite direction to when you opened it. If you used a buy trade to open, you sell to close – and vice versa.
Go to your open positions, where you’ll be able to see your running profit or loss. When you’re ready to close your position, find EUR/USD and hit ‘close’ to sell 1000 EUR/USD.