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If you’re going to trade Forex, the first thing you need to understand is Forex currency pairs.
Unlike the stock market, where you buy a single asset like a company’s shares, Forex trading always involves two currencies being traded against each other.
That’s because one currency's value is always measured relative to another.
Think of it like this: if you were exchanging US dollars for euros at an airport, you'd see a sign showing the exchange rate. That’s exactly how Forex works, except instead of exchanging money for a vacation, traders buy and sell currencies to profit from price changes.
In this lesson, we’ll break down currency pairs, how they work, and why they matter in Forex trading.
In Forex, currencies are always traded in pairs because you can’t trade one without comparing it to another.
As explained in Lesson 1, each pair consists of:
The exchange rate tells you how much of the quote currency is needed to buy one unit of the base currency.
Forex currency pairs are written in three-letter codes based on international standards.
The first two letters usually represent the country.
The third letter represents the currency itself.
For example:
USD = US Dollar (US = United States, D = Dollar)
GBP = British Pound (GB = Great Britain, P = Pound)
JPY = Japanese Yen (JP = Japan, Y = Yen)
AUD = Australian Dollar (AU = Australia, D = Dollar)
Knowing these codes will help you read Forex charts and price quotes easily.
Exchange rates fluctuate due to various market factors. Here are two key terms you’ll often hear:
Currency Appreciation: When the exchange rate increases, meaning the base currency is getting stronger.
Currency Depreciation: When the exchange rate decreases, meaning the base currency is getting weaker.
Example: If EUR/USD moves from 1.08 to 1.10, the Euro has appreciated against the US Dollar.
But if it drops to 1.06, the Euro has depreciated.
There are three main types of currency pairs: major currency pairs, minor currency pairs, and exotic currency pairs.
These include the US Dollar (USD) and one of the major global currencies. They are the most traded pairs, offering high liquidity and lower spreads.
These pairs do not include the US Dollar but still involve major currencies. They have slightly lower liquidity than major pairs but are still widely traded.
These pairs consist of one major currency and one currency from an emerging or developing economy. They tend to have higher spreads and lower liquidity.
Knowing that we have multiple currency pairs, how are the pairs characterized?
The currencies are characterized based on volatility, liquidity, and correlation.
Volatility refers to the amount and speed at which a currency pair’s price fluctuates over a given period.
Some pairs move rapidly, creating big profit (or loss) opportunities, while others move more steadily, making them less risky.
These pairs experience frequent and large price swings.
High volatility can be risky but also provides opportunities for big gains.
Ideal for traders who like short-term, high-impact trades (like scalping or day trading).
Examples:
GBP/JPY: Known as one of the most volatile pairs due to its large daily price movements.
AUD/USD & NZD/USD: Often affected by commodity prices and global risk sentiment.
Exotic pairs (e.g., USD/TRY, EUR/BRL): These tend to be highly volatile due to economic instability.
These pairs move more predictably with smaller price fluctuations.
Ideal for traders looking for stable, long-term positions.
Often have lower trading costs (smaller spreads) because of their high liquidity.
EUR/USD: The most traded pair with relatively smooth price action.
USD/CHF: Often considered a “safe-haven” pair that moves steadily.
Liquidity refers to how easily you can buy or sell a currency pair without causing a significant price change.
Pairs with high liquidity are easier to trade and usually have lower transaction costs, while pairs with low liquidity may have higher costs and price slippage.
Frequently traded with tight spreads (lower costs).
Offer smooth price action and fast trade execution.
Less prone to extreme price jumps.
EUR/USD: The most liquid pair in the world.
USD/JPY: Very high liquidity, especially during the Asian session.
GBP/USD: Slightly more volatile but still highly liquid.
Trade less frequently, leading to wider spreads.
Can experience sharp price jumps if a large order enters the market.
Require caution as they may be harder to exit at desired prices.
USD/MXN (US Dollar/Mexican Peso): Has larger spreads due to lower trading volume.
USD/ZAR (US Dollar/South African Rand): Can have unpredictable price gaps.
Correlation measures whether two currency pairs move in the same or opposite directions.
Some pairs tend to rise and fall together, while others move in opposite directions.
Understanding correlation helps you diversify your trades and manage risk.
If one pair rises, the other also rises.
Often happens when two economies are closely linked.
EUR/USD & GBP/USD: Since both have the USD as the quote currency, they usually move together.
AUD/USD & NZD/USD: Australia and New Zealand have similar economic influences.
If one pair rises, the other falls.
Often occurs when one currency is a "safe haven" and the other is risk-sensitive.
EUR/USD & USD/CHF: When the Euro rises, the Swiss Franc usually weakens.
USD/JPY & Gold (XAU/USD): When USD/JPY rises, gold prices tend to fall.
Some pairs move independently and don’t have a strong relationship.
These pairs can be useful for diversifying trades.
Examples: EUR/JPY & USD/CAD: These pairs don’t strongly affect each other.
Every currency pair has unique traits that affect how it moves in the market.
When choosing a pair to trade, consider:
Volatility: Do you prefer fast price movements or a steadier pace?
Liquidity: Do you want lower costs and easier trade execution?
Correlation: Are you trading pairs that move together or hedge against each other?
The Forex market runs 24 hours a day, five days a week, across different global time zones. Below is a breakdown of the forex market hours and sessions.
The Asian session begins in Tokyo and overlaps with the end of the Sydney session.
It is characterized by lower trading volumes and volatility compared to other sessions, with major currency pairs like AUD/USD and USD/JPY often experiencing increased activity
The European session, dominated by trading activity in London, is considered the most active and liquid period of the day, with significant overlaps with the Asian and North American sessions.
Major currency pairs such as EUR/USD and GBP/USD tend to exhibit heightened volatility during this session.
The North American session, centered around New York, sees increased trading volumes and volatility, especially during the overlap with the European session.
It is characterized by significant price movements in currency pairs involving the US dollar (USD).
There are overlaps that occur between trading sessions, such as the European and North American overlap, often resulting in increased liquidity and volatility as traders from different regions are active simultaneously.
Forex trading is based on currency pairs, where one currency is valued against another.
Currency pairs are categorized into majors, minors, and exotics, each with different levels of liquidity and volatility.
Exchange rates fluctuate between trading sessions, such as the European and North American overlap, which often increases based on market conditions, economic news, and geopolitical events.
In Lesson 3, we’ll explore how Forex trading works.
Our easy-to-use glossary breaks down complex trading terms into plain English. Learn the key terms every trader needs to know.
Explore our latest blog posts for trading tips, market insights,and real-world strategies. The XS blog keeps you informed, inspired, and ready to trade.
