Curious about forex trading but unsure where to start?

Understanding currency pairs is the the first step to confident forex trading. Let’s break it down.

‍

What is a forex pair?

A forex pair consists of two currencies traded against each other, like EUR/USD (Euro vs. US Dollar) or GBP/JPY (British Pound vs. Japanese Yen). It shows how much one currency is worth compared to the other.

How to interpret forex pairs

Each forex pair consists of:

• Base currency: The first currency in the pair (e.g., EUR in EUR/USD).
  ‍
• Quote currency: The second currency, which indicates the value of the base currency (e.g., USD in EUR/USD).

EUR/USD = 1.1050 indicates that one euro buys 1.1050 US dollars. This rate constantly changes based on market factors.

‍

Types of currency pairs

There are three main categories:

• Major pairs: Include USD and major economies (e.g., EUR/USD, USD/JPY). They are the most traded and stable.
  ‍
• Minor pairs: Exclude USD but involve other strong currencies (e.g., EUR/GBP, AUD/JPY).
  ‍
• Exotic pairs: Pair a major currency with an emerging market currency (e.g., USD/TRY, GBP/MXN), which tend to be more volatile.
  
  ‍

Forex basics for beginners

Beginners can benefit from starting with major pairs, due to their liquidity and predictable spreads.

Pips: Small price movements

A pip (percentage in point) is the smallest price movement in a forex pair, usually at the fourth decimal place (e.g., 1.1050 to 1.1051 is a 1-pip move). For JPY pairs, it's the second decimal place.

‍

Forex lot sizes: Understanding your trade size

Forex is traded in lots, which determine trade size:

• Standard lot: 100,000 units
  ‍
• Mini lot: 10,000 units
  ‍
• Micro lot: 1,000 units
  ‍
• Nano lot: 100 units

Pip value: Calculating profits and losses

Formula: Pip value = (pip in decimal places) × (lot size) × (exchange Rate)

Example: For a mini lot of EUR/USD (10,000 units) at an exchange rate of 1.1050: Pip value = (0.0001) × (10,000) × (1.1050) ≈ $1.105 per pip.

‍

What are spreads in forex trading?

The spread is the difference between the bid (sell) and ask (buy) prices. Think of the spread as the embedded cost of entering a trade.

Example for USD/JPY:

• Bid price: 112.50
  ‍
• Ask price: 112.55
  ‍
• Spread: 0.05 JPY
  
  ‍

What causes spreads to widen or tighten?

• Liquidity: Popular pairs have smaller spreads due to high trading volume.
  ‍
• Volatility: High market fluctuations can widen spreads.
  ‍
• Time of day: Active trading sessions have lower spreads.
  ‍
• Broker differences: Brokers offer different spreads.

Mastering these concepts helps you trade more effectively with clarity and control.

Ready to dive deeper? Explore free courses and practise with a Deriv demo account.

Log in to Deriv Academy with your account email and password to get started!