Module 1: What forex is · Lesson 2 of 13
How currency pairs work
3 min read
In forex, currencies are always priced in pairs, because you are always buying one currency while selling another. The price tells you how much of the second currency you need to buy one unit of the first.
Base and quote currency
Take the pair EUR/USD. The first currency (EUR) is the base currency and the second (USD) is the quote currency. A price of 1.1000 means one euro costs 1.10 US dollars.
- If you buy EUR/USD (go long), you are buying euros and selling dollars, hoping the euro rises.
- If you sell EUR/USD (go short), you are selling euros and buying dollars, hoping the euro falls.
Each currency has a three-letter code: USD (US dollar), EUR (euro), GBP (British pound), JPY (Japanese yen), CHF (Swiss franc), AUD (Australian dollar) and so on.
Majors, crosses and exotics
| Type | What it means | Examples |
|---|---|---|
| Majors | Pairs that include the US dollar and another big currency | EUR/USD, USD/JPY, GBP/USD |
| Crosses | Pairs of major currencies without the US dollar | EUR/GBP, AUD/JPY |
| Exotics | A major paired with a less widely traded currency | USD/TRY, EUR/ZAR |
Majors are usually the most liquid and have the lowest trading costs.
Bid, ask and spread
Brokers show two prices for every pair:
- The bid is the price at which you can sell the base currency.
- The ask (or offer) is the price at which you can buy it.
The ask is always slightly higher than the bid. The gap between them is the spread, and it is one of the main costs of trading.
Example: For illustration, a broker quotes GBP/USD at 1.2500 bid and 1.2502 ask. Buying costs 1.2502 dollars per pound, and if you sold immediately you would only get 1.2500. The difference of 0.0002 is the spread, so a new trade starts with a small loss.
Spreads tend to be narrower in busy, liquid pairs and wider in exotics or during quiet or volatile periods.
Key takeaways
- A currency pair shows how much of the quote currency buys one unit of the base currency.
- Buying a pair means buying the base and selling the quote; selling does the reverse.
- The bid is where you sell, the ask is where you buy.
- The spread between bid and ask is a built-in trading cost.
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