Curious about forex trading but unsure where to start? Understanding currency pairs is the foundation of trading. Let’s break it down.

What is a Forex pair?

A forex pair is a matchup of two currencies, 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 read 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).

If EUR/USD = 1.1050, it means 1 euro is worth 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

New traders should start with major pairs due to their stability and lower volatility.

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: How much are you trading?

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 it as a transaction fee.

Example for USD/JPY:

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

What affects spreads?

• 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 forex pairs, pips, lots, and spreads is key to making informed trades.

Ready to learn more? Continue your journey with our free courses and practice on a Deriv demo account.

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