How forex pairs are quoted
A forex pair is written as base/quote. EUR/USD: EUR is the base; USD is the quote. The price reflects how many units of the quote currency one unit of the base buys. EUR/USD at 1.0850 means one euro buys 1.0850 US dollars.
The quote is two-sided: bid and ask. Bid is the lower number — what the broker pays to buy the base from the trader. Ask is the higher number — what the broker charges to sell the base to the trader. Traders open positions at the ask and close them at the bid; the difference is the spread, paid on entry.
Most major pairs quote to four decimal places (the Pip sits at the fourth decimal). JPY pairs quote to two decimal places (the pip sits at the second). Some platforms also display fractional pips (the fifth or third decimal — pipettes), used in high-precision pricing.
Major, minor, and exotic pairs
Major pairs include the US dollar paired with one of the other heavyweight currencies: EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, NZD/USD. These have the deepest interbank liquidity and the tightest typical spreads.
Minor or cross pairs combine two non-USD majors: EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY. Spreads typically widen by a factor of 1.5–3 versus the underlying USD pairs; pricing is derived from the cross of two USD quotes (e.g. EUR/JPY ≈ EUR/USD × USD/JPY).
Exotic pairs combine a major with an emerging-market currency: USD/MXN, USD/ZAR, USD/TRY, USD/BRL. Spreads can be 5–20 times the major-pair equivalent, reflecting thinner interbank liquidity. ESMA leverage caps differ between major and non-major FX (1:30 versus 1:20), reflecting the regulator's assessment of relative volatility.
Long and short — the bilateral structure
Long a pair means buying the base and selling the quote simultaneously. A long EUR/USD position is long EUR and short USD. The position profits when the base strengthens relative to the quote.
Short a pair is the inverse: short the base, long the quote, profitable when the base weakens relative to the quote. There is no equivalent of borrowing to short as in equity markets — the bilateral nature of currency pairs means selling EUR/USD is mechanically the same as buying USD/EUR.
Both directions are equally accessible. Forex does not have a structural long-bias in the way that equity markets do (where indices tend to drift upward over decades). Currency moves are zero-sum across the pair; one side's strength is the other side's weakness.
A forex trade end-to-end
A USD-account trader opens a long EUR/USD position of 1 standard Lot size at 1.0850 and closes at 1.0900, a 50-pip move:
Position size = 100,000 EUR. Entry rate = 1.0850 (ask). Exit rate = 1.0900 (bid — price moved 50 pips upward). Pip value = $10 per pip on a USD-quoted pair, 1 standard lot. Gross profit before costs = 50 × $10 = $500.
Costs on the round trip: spread at entry approximately 1.2 pips × $10 = $12. Spread at exit approximately 1.2 pips × $10 = $12. Round-trip spread cost = $24. Net profit before any swap = $500 − $24 = $476.
If the position was held overnight, swap applies. At a long EUR/USD swap of approximately −$10 per night, holding for two nights deducts another $20.
Final P&L = $476 − $20 = $456 if held two nights, $476 if closed same-day. The same trade in pips ignores the cost layer entirely. A 50-pip movement is mathematically a positive trade; the costs determine whether the account changes by what the pip count suggests or by something materially less.
What moves currency pairs
Major-pair price action is driven primarily by interest rate differentials between the two currencies' central banks. When the Fed signals tighter policy and the ECB signals easier policy, USD strengthens against EUR; EUR/USD falls.
Within that primary driver, second-order influences add volatility: economic data releases (Non-Farm Payrolls, CPI, GDP), central bank meeting minutes, geopolitical events, risk sentiment shifts (which move USD/JPY and AUD/USD particularly).
Calculated economic events are scheduled in the economic calendar; geopolitical events are unpredictable. The combination — a known event on top of an unknown sentiment backdrop — is what drives the most material short-term moves on majors.
What forex is not
Forex is not an investment in the conventional sense. There is no underlying asset that compounds value over time. EUR/USD does not pay dividends or accrue earnings; it simply reflects the relative price of two currencies. Holding a forex position does not produce value in the absence of price movement.
Forex is not a casino. The price reflects supply and demand from a vast interbank market; movements have economic causes. But the per-trade outcome is uncertain, and the cost layer (spread, swap, slippage) creates a structural drag that ensures the median retail forex trader has a negative expected outcome before any consideration of skill.
Forex is a market for transferring exposure between currencies. Its primary economic function is corporate and institutional hedging. Retail forex trading is a peripheral use of the same market infrastructure, where retail traders provide liquidity in exchange for the chance to profit on directional movement — at a structural cost they often underestimate.