A Beginner’s Guide to Forex Currency Pairs
All trades in the foreign exchange (forex) market involve currency pairs. A currency pair consists of two currencies traded against each other, with the pair’s value reflecting the current exchange rate between them.
Currency Pairs 101
In forex trading, a currency pair compares two currencies: the first is called the base currency, and the second is the quote currency.
If you’ve ever exchanged money while traveling, think of your home currency as the base and the foreign currency as the quote currency.
Each currency in the forex market is assigned a unique three-letter code by the International Organization for Standardization (ISO), called an ISO currency code. For example, the US dollar is USD, and the British pound sterling is GBP.
Understanding Forex Currency Pairs
When trading a currency pair, your position depends on the exchange rate between the two currencies.
For instance, in the GBP/USD pair, GBP is the base currency, and USD is the quote currency. Each pair can be expressed with a direct or indirect exchange rate:
- Direct exchange rate: Shows the cost of one unit of the base currency in terms of the quote currency.
Example: If GBP/USD = 1.11, 1 British pound can buy 1.11 US dollars. - Indirect exchange rate: Shows the cost of one unit of the quote currency in terms of the base currency.
Example: If GBP/USD = 0.90, 1 US dollar can buy 0.90 British pounds.
Using the travel analogy, a direct exchange occurs when exchanging your home currency for a foreign currency, while an indirect exchange is exchanging foreign currency back to your home currency.
Trading Forex Currency Pairs
In forex, buying a currency pair means you expect the base currency to rise in value relative to the quote currency. Selling a currency pair means you anticipate the base currency will fall.
For example, buying GBP/USD implies you expect the British pound to strengthen against the US dollar. Conversely, selling GBP/USD means you expect the pound to weaken relative to the dollar and aim to sell before its value drops further.
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For example, suppose GBP/USD is trading at 1.25 USD, and you decide to buy 1 GBP.
If the GBP/USD rate rises from 1.25 to 1.30 USD per GBP, the US dollar has weakened, and the British pound has strengthened, as you now need more USD to purchase the same amount of GBP.
Conversely, if GBP/USD drops from 1.25 to 1.20 USD, the US dollar has gained value, and the British pound has lost value, since fewer USD are required to buy 1 GBP.
Forex rates fluctuate due to multiple factors, which is why currency pair prices constantly change.
Now that you understand how forex currency pairs work, you can trade them via CFDs, options, and multipliers on Deriv. Explore a wide range of major, minor, exotic, and micro forex pairs across our platforms. Want to practice first? Try our free demo account, preloaded with 10,000 USD, to trade risk-free.
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