BEGINNER'S GUIDE TO FOREX: PAIRS, QUOTES, AND PRICING

Understanding Forex Currency Pairs

Forex, short for foreign exchange, involves the buying and selling of currencies in a decentralised global market. At its most basic, forex trading is the process of exchanging one currency for another with the aim of making a profit. To do this effectively, the first and most important component to grasp is the concept of currency pairs.

What are Currency Pairs?

All forex trades involve two currencies paired together. This format helps traders understand which currency is being bought and which is being sold. A currency pair is symbolised by two three-letter abbreviations, separated by a slash—for example, EUR/USD.

In this pairing:

• EUR (Euro) is the base currency.
• USD (United States Dollar) is the quote or counter currency.

When you see EUR/USD = 1.1000, it means one euro is worth 1.10 US dollars. You buy the base currency and sell the quote currency. If you believe the euro will strengthen against the US dollar, you would go long (buy). If you anticipate the euro will weaken, you would go short (sell).

Major, Minor and Exotic Pairs

Forex currency pairs are divided into three broad categories:

• Major Pairs: Always include the US dollar and one of the most frequently traded global currencies, such as EUR/USD, GBP/USD, or USD/JPY.
• Minor Pairs: These don't include the US dollar but feature other strong currencies, like EUR/GBP or AUD/JPY.
• Exotic Pairs: Consist of one major currency and one from a developing or emerging economy, such as USD/TRY (Turkish Lira) or EUR/ZAR (South African Rand).

Understanding Correlation in Pairs

Some currency pairs move in the same direction due to economic ties, while others consistently move in opposite directions. Recognising these correlations can help manage risk exposure. For example, EUR/USD and GBP/USD often show positive correlation, while USD/CHF moves in the opposite direction to EUR/USD.

Choosing the Right Pair

As a beginner, major pairs are generally recommended because of their liquidity, tighter spreads and lower volatility. They make it easier to understand market movements and to implement trading strategies. Eventually, as you gain experience, you can explore minors and exotics for broader opportunities.

Understanding pairs is foundational to successful forex trading. It is critical to not only know which pairs you are trading, but also the geopolitical and economic contexts affecting them. With this knowledge, you can begin formulating a trading approach that aligns with your financial goals and risk profile.

How Forex Quotes and Prices Work

Understanding forex quotes and how pricing functions is essential for anyone entering the currency market. It lets you make informed decisions, execute trades wisely, and interpret market movements correctly. Unlike stocks, forex operates on a pair-based quoting method, meaning the value of one currency is always relative to another.

Base Currency vs. Quote Currency

Every forex quote involves two components:

• Base Currency: The first currency in the pair, indicating what you are buying or selling.
• Quote Currency: The second currency, showing how much of it is needed to purchase one unit of the base currency.

If EUR/USD = 1.1000, it means it costs 1.10 U.S. dollars to purchase 1 euro. The quoted price reflects the current exchange rate, which is always subject to change due to market forces.

Bid and Ask Prices

Forex quotes include two prices:

• Bid Price: The price at which the broker is willing to buy the base currency from you (you sell).
• Ask Price: The price at which the broker is willing to sell the base currency to you (you buy).

The difference between these prices is called the spread, and it represents the broker’s profit. For instance, if EUR/USD is quoted at 1.0998/1.1000, the spread is 2 pips (percentage points in price).

Pips and Lots Explained

A pip is the standard unit of measurement expressing the change in value between two currencies. For most pairs, one pip equals 0.0001. Understanding pips is key to calculating profit and loss.

Forex trading is generally conducted in lots:

• Standard Lot: 100,000 units of the base currency.
• Mini Lot: 10,000 units.
• Micro Lot: 1,000 units.

This system provides scalability, allowing both large institutions and individual traders to participate based on their capital.

Leverage and Margin

Forex trading allows for significant leverage, enabling traders to control large positions with relatively small capital. For example, a 50:1 leverage means you can control $50,000 with just $1,000. However, while leverage can amplify gains, it also increases the potential for loss.

Margin is the collateral required to open and maintain a leveraged position. If your trade moves against you, your broker may issue a margin call, requiring you to deposit more funds.

Understanding Price Movement

Forex prices fluctuate based on multiple factors:

• Economic Indicators: Reports on GDP, inflation, and employment.
• Central Bank Policies: Interest rate decisions from institutions like the Federal Reserve or ECB.
• Geopolitical Events: Elections, wars, and trade agreements can affect supply and demand.
• Market Sentiment: Reaction to news, trends, and investor behaviour influences volatility.

The forex market incorporates all these variables into exchange rates, creating a dynamic environment that’s constantly shifting.

To summarise, forex quotes give you a snapshot of the current exchange rate between two currencies. Knowing how to read these figures—alongside understanding spreads, pips, and leverage—equips you with the tools needed to manage trades effectively and with competence.

Trading Sessions and Market Hours

The forex market operates 24 hours a day, five days a week, making it one of the most accessible and liquid financial markets in the world. However, the level of trading activity is not constant throughout the day. Instead, activity peaks and wanes depending on the global trading session underway. Understanding these sessions can help you choose the best times to trade and develop an effective strategy.

The Four Major Forex Trading Sessions

Forex trading follows the business hours of key financial centres across the globe. The main sessions are:

• Sydney Session: 10 PM – 7 AM GMT
• Tokyo Session (Asian): 12 AM – 9 AM GMT
• London Session (European): 8 AM – 5 PM GMT
• New York Session (US): 1 PM – 10 PM GMT

These sessions overlap at certain times, particularly between London and New York (1 PM – 5 PM GMT), creating peak volatility and higher trading volumes. These overlaps often present the most lucrative opportunities for traders.

Impact of Trading Sessions on Currency Pairs

Different currency pairs are more active during their respective domestic sessions:

• Asian Session: Best for trading JPY, AUD, and NZD pairs.
• European Session: High volatility for EUR, GBP, and CHF pairs.
• US Session: Active trading in USD, CAD, and continuing action in EUR, GBP.

Traders often align their strategies with session characteristics. For example, a scalper may prefer overlapping sessions for rapid trades, while a swing trader could capitalise on quieter periods to establish longer-term positions.

Session Volatility and Liquidity

Liquidity and volatility fluctuate significantly across sessions:

• High Liquidity: Occurs during overlapping sessions—particularly London/New York—where institutional activity intensifies.
• Low Liquidity: Typically seen during the Sydney session on Mondays or just before session closes, leading to wider spreads and limited price movements.

Understanding when volatility is likely to rise helps manage risk and avoid unnecessary losses due to erratic price swings or slippage.

Weekend Gaps and Market Openings

Although the forex market closes on Friday at 10 PM GMT and reopens Sunday at 10 PM GMT, prices can shift during the weekend due to news or geopolitical events, leading to weekend gaps. These gaps present both risks and opportunities. Traders who hold positions over the weekend should be aware of potential price jumps at the market open.

Optimal Trading Times

For beginners, the most stable and liquid times to trade are during the London session and its overlap with the New York session. These hours offer the best chance to analyse price action and execute trades efficiently with tighter spreads.

Being aware of the sessional rhythms of the forex market allows traders to plan more strategically. By matching the right strategy to the appropriate session, you enhance your ability to capitalise on high-probability setups and avoid avoidable errors.