A forex pair is two currencies quoted together, where the price tells you how much of one currency you need to buy a single unit of the other. Every trade in the foreign exchange market involves simultaneously buying one currency and selling another, which is why currencies always trade in pairs rather than individually. Understanding how to read these pairs, what moves their prices, and what the costs look like gives you the foundation for everything else in forex.
How to Read a Currency Pair
A currency pair is written as two three-letter codes separated by a slash, like EUR/USD or GBP/JPY. The currency on the left is the base currency, and the currency on the right is the quote currency. The price you see tells you how much of the quote currency it takes to buy one unit of the base currency.
If EUR/USD is quoted at 1.0850, that means one euro costs 1.0850 U.S. dollars. If the price rises to 1.0900, the euro has gotten stronger relative to the dollar, because it now takes more dollars to buy the same euro. If the price drops to 1.0800, the euro has weakened.
When you “buy” a currency pair, you’re buying the base currency and selling the quote currency. When you “sell” a pair, you’re doing the opposite. So buying EUR/USD means you expect the euro to strengthen against the dollar. Selling EUR/USD means you expect the dollar to gain ground against the euro.
Major, Minor, and Exotic Pairs
Not all currency pairs behave the same way. They fall into three broad categories based on how heavily they’re traded.
Major pairs always include the U.S. dollar on one side and one of the world’s other most-traded currencies on the other. EUR/USD and USD/JPY are the two most liquid pairs in the market, meaning there’s a huge volume of buying and selling at any given moment. That high liquidity translates into tighter costs for traders (more on that below).
Minor pairs, also called crosses, pair two major currencies together but leave out the U.S. dollar. EUR/GBP, GBP/JPY, and EUR/CHF are common examples. These are still actively traded, but spreads tend to be a bit wider than the majors.
Exotic pairs match the U.S. dollar (or another major currency) with a currency from an emerging or smaller economy, like USD/SGD (U.S. dollar against the Singapore dollar). Exotic pairs are less liquid, which means wider spreads and sometimes more volatile price swings. They can be useful for specific trading strategies, but the higher costs make them less forgiving for beginners.
What Pips and Spreads Mean for You
Price changes in forex are measured in pips. A pip is one unit of the fourth decimal place in most currency pairs, or 0.0001. If EUR/USD moves from 1.0850 to 1.0851, it moved one pip. That’s the smallest standard increment the price can shift.
Some brokers quote prices out to a fifth decimal place. That extra digit is called a fractional pip or “pipette,” giving you a more precise picture of the price, but the standard unit of measurement remains the pip at the fourth decimal.
The spread is the difference between the bid price (what buyers will pay) and the ask price (what sellers are asking for), measured in pips. If EUR/USD has a bid of 1.0848 and an ask of 1.0850, the spread is 2 pips. This spread is effectively the cost of entering a trade. You start slightly in the red every time you open a position, because you buy at the ask and would have to sell at the lower bid. Major pairs like EUR/USD often have spreads of 1 to 2 pips, while exotic pairs can see spreads of 10 pips or more.
What Makes Pair Prices Move
Since a currency pair reflects the relative strength of two economies, anything that shifts the economic outlook of either country can move the price. Several factors matter most.
Interest rates are the single biggest driver. Central banks set benchmark interest rates, and when one country’s rates are higher than another’s, its currency tends to attract foreign capital because investors earn a better return holding assets in that currency. If the European Central Bank raises rates while the Federal Reserve holds steady, EUR/USD will likely rise as money flows toward the euro.
Inflation erodes a currency’s purchasing power. A country with persistently high inflation will generally see its currency weaken over time relative to countries with lower inflation, because each unit of that currency buys less. Central banks often raise interest rates to fight inflation, which is why rate decisions and inflation data are so closely linked in their effect on forex prices.
Trade balances also play a role. A country that exports more than it imports creates demand for its own currency, since foreign buyers need that currency to pay for goods. A country running large trade deficits does the opposite, selling its own currency to pay for imports, which puts downward pressure on its value.
Government debt levels can weigh on a currency when they grow large enough to raise concerns about inflation or fiscal stability. Heavy debt sometimes pushes governments toward policies that expand the money supply, which tends to weaken the currency.
In practice, these factors interact constantly. A single economic data release, like a jobs report or an inflation reading, can move a pair sharply in seconds because traders are recalculating their expectations for interest rates and growth in real time.
How a Forex Trade Actually Works
When you place a forex trade, you choose a pair, decide whether to buy or sell, and select a position size. Position sizes in forex are measured in lots. A standard lot is 100,000 units of the base currency. Mini lots (10,000 units) and micro lots (1,000 units) let smaller traders participate without needing the full capital that a standard lot would require.
The pip value of your trade depends on your lot size. On a standard lot of EUR/USD, one pip of movement equals roughly $10. On a mini lot, it’s about $1. On a micro lot, it’s around $0.10. This means the same 50-pip move in EUR/USD could represent a $500 gain or loss on a standard lot, or a $5 gain or loss on a micro lot.
Most retail forex brokers offer leverage, which lets you control a larger position than your account balance would otherwise allow. If you have $1,000 and your broker offers 50:1 leverage, you could open a position worth $50,000. Leverage amplifies both gains and losses by the same factor. A 1% move in your favor on a $50,000 position nets $500, but a 1% move against you wipes out half of your $1,000 account. Leverage limits vary by country and broker, so check the specific margin requirements before trading.
Why Pairs Always Move in Relative Terms
One thing that separates forex from stocks or commodities is that you’re never just betting on one asset going up or down. You’re always betting on the relationship between two currencies. The dollar can be weakening overall, but if the euro is weakening faster, EUR/USD still falls. This relative dynamic means you need to consider the economic picture on both sides of the pair, not just one.
This also means forex offers trading opportunities in any economic environment. In a stock market crash, there may be few places to go long. In forex, if one currency is falling, the other side of that pair is rising by definition. The market doesn’t have “up” or “down” days in the same way. It has shifts in relative strength, and each pair tells its own story about the two economies behind it.