Understanding Currency Pairs and Quotes

How Currency Pairs Are Quoted

In the forex market, currencies are always traded in pairs. When you buy one currency, you simultaneously sell another. This is the fundamental concept behind every single transaction that takes place in the forex market.

A currency pair is expressed as two currency codes separated by a slash — for example, EUR/USD. The first currency is the base currency and the second is the quote currency. The price you see tells you how much of the quote currency is needed to buy one unit of the base currency.

Major, Minor, and Exotic Pairs

Currency pairs are broadly categorised into three groups:

• Major Pairs — always include the US Dollar and represent the most traded pairs in the world. Examples: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, USD/CAD, NZD/USD.
• Minor Pairs — pairs that do not include the USD but consist of other major currencies. Examples: EUR/GBP, EUR/JPY, GBP/JPY.
• Exotic Pairs — one major currency paired with the currency of an emerging or smaller economy. Examples: USD/TRY, EUR/ZAR, GBP/SGD.

Majors are typically the most liquid and have the lowest spreads, making them ideal for beginners. Exotics carry higher spreads and can be more volatile.

The Bid, Ask, and Spread

When you look at a forex quote, you will see two prices: the bid and the ask. The bid is the price at which your broker will buy the base currency from you (the price you sell at). The ask is the price at which your broker will sell the base currency to you (the price you buy at). The difference between these two prices is called the spread, and it represents the broker's compensation.

For example, if EUR/USD has a bid of 1.08500 and an ask of 1.08510, the spread is 1 pip. We will explain what a pip is in the next lesson.

Practical Exercise

Open a demo account with any reputable forex broker and locate the EUR/USD, GBP/USD, and USD/JPY pairs. Note the current bid and ask prices for each and calculate the spread. This simple exercise will cement your understanding of how quotes work in real time.

Summary

You now understand what currency pairs are, how they are quoted, and the difference between major, minor, and exotic pairs. In the next lesson, we move on to pips, lots, and how position sizes are calculated.