Money Matters | How Currency Pairs Work (2024)

In forex, you buy and sell currencies (for example US dollar, Japanese yen, euro), and you may even earn a profit, according to which currency pair you exchanged. This is why we call it foreign exchange. Depending on the currency rates and market movements, you can make profits. It all depends on how alert you are and how economies change.

Don’t confuse forex trading with physical trading – it’s all online! You buy a currency online, sell another online, and you make a profit online. If you have a forex trading account, all your profit will be available there. You can withdraw your profit to your personal bank account any time – and finally cash it, if you want.

Because it’s all about money, let’s start with the basics. To make things simpler, in forex we use symbols. The most commonly traded currencies are listed in the table below.

How Currency Pairs Work

So this is how it goes: trading always consists of buying one currency and selling another. Together these currencies make up a currency pair.

Imagine choosing the USD/JPY pair. You expect the US dollar to increase in value as compared to the yen. So you buy USD and sell JPY. Remember that in order to buy one currency you have to sell another. If the dollar rises against the yen, you close the position and make a profit.

Why is forex trading done in currency pairs? Imagine that the first currency in any currency pair (in our example the USD) is a potato. So in order to buy a potato, you need to pay a certain amount of the second currency (in our example, JPY).

There are 3 categories of currency pairs: major, minor, exotic.

Majors

Major currency pairs (majors) are traded most frequently, and they all contain the US dollar (USD).

Minors

Minor currency pairs (crosses) don’t contain the USD. The most active ones contain EUR, JPY, and GBP.

Exotics

Exotic currency pairs contain one major currency as the base currency, paired with any non-major currency, such as South African rand, Mexican peso, or Danish krone. Exotic pairs are not so widely traded. The table below contains a few examples of exotic currency pairs.