In forex trading, all transactions revolve around currency pairs. Every trade you make involves buying one currency and selling another at the same time. Understanding how these pairs work is essential for interpreting price quotes, choosing your trading strategy, and managing risk.

In this guide, we’ll break down currency pair types, how they’re quoted, and how to choose the ones best suited to your trading style.

What Are Currency Pairs?

A currency pair shows the value of one currency relative to another. For example:

• EUR/USD = 1.1050 means 1 Euro equals 1.1050 US Dollars.

The first currency in the pair is called the base currency, and the second is the quote currency.

Types of Currency Pairs

Forex pairs are grouped into three main categories:

1. Major Pairs

These include the world’s most traded currencies, all paired with the US Dollar. Examples:

• EUR/USD (Euro / US Dollar)

• GBP/USD (British Pound / US Dollar)

• USD/JPY (US Dollar / Japanese Yen)

Advantages:

• High liquidity

• Low spreads

• Strong market analysis coverage

2. Minor Pairs

These pairs don’t include the US Dollar but involve other major currencies. Examples:

• EUR/GBP (Euro / British Pound)

• AUD/JPY (Australian Dollar / Japanese Yen)

Advantages:

• Less correlation to the USD

• Offers diversification opportunities

3. Exotic Pairs

These combine a major currency with a currency from an emerging or smaller economy. Examples:

• USD/TRY (US Dollar / Turkish Lira)

• EUR/ZAR (Euro / South African Rand)

Advantages:

• Potential for larger price movements

• Exposure to unique market dynamics

Disadvantages:

• Wider spreads

• Lower liquidity

How Currency Pairs Are Quoted

Currency pairs have two prices:

• Bid Price: The price at which you can sell the base currency.

• Ask Price: The price at which you can buy the base currency.

The difference between these two is called the spread, which represents a broker’s transaction cost.

Understanding Price Movements

When trading a pair like EUR/USD:

• If the price goes up, the Euro has strengthened against the Dollar.

• If the price goes down, the Euro has weakened against the Dollar.

Choosing the Right Pairs to Trade

When selecting a currency pair, consider:

1. Liquidity — Major pairs are more liquid and stable.

2. Volatility — Exotic pairs move more sharply but carry more risk.

3. Trading Hours — Some pairs are more active during specific sessions.

4. Economic Events — News from the base or quote currency’s country can cause big moves.

Correlation Between Pairs

Some pairs move in the same direction (positive correlation), while others move in opposite directions (negative correlation). For example:

• EUR/USD and GBP/USD tend to move together.

• EUR/USD and USD/CHF often move in opposite directions.

Understanding correlations helps with hedging and portfolio risk management.

Conclusion

Currency pairs are the foundation of forex trading. Knowing how they’re structured, categorized, and influenced by market forces is critical for making smart trading decisions.

Whether you focus on major pairs for stability or explore exotic pairs for higher risk and reward, always align your choices with your trading strategy, risk tolerance, and market knowledge.