What are Currency Pairs?
In forex, you always trade one currency for another currency — something like trading cash when you travel, but on the computer. That’s where currency pairs enter the picture.
A pair will look like this:
EUR/USD = 1.1050
This implies that one Euro is equal to 1.1050 US Dollars.
A currency pair comprises two components:
- Base Currency: The first of the two (EUR in EUR/USD).
- Quote Currency: The second currency in the pair (USD in EUR/USD).
Therefore, buying EUR/USD means buying Euros but at the same time selling Dollars.
If you buy, you’re doing the opposite — selling Dollars and buying Euros.
Major, minor, and exotic currency pairs.
- Major Currency Pairs: Always include the US dollar (e.g., EUR/USD, USD/JPY). These are generally the most liquid and most traded.
- Minor Pairs: Do not include USD but major currencies (such as EUR/GBP or AUD/NZD).
- Exotic Pairs: Have one major and one emerging currency (like USD/INR or EUR/TRY). They are less liquid and riskier.
To begin with, we should start from major pairs — they are more stable with tighter spreads.
New to the terminology? Start with 10 Forex Terms that Every Beginner Should Know
What is a Pip in Forex?
Pip, which stands for “percentage in point,” is used to measure the movement of a currency pair.
In most pairs, 1 pip = 0.0001.
Example:
If EUR/USD goes from 1.1050 to 1.1055, that is a 5-pip rise.
Why pips matter:
Pips determine how much you earn or lose in a trade. They’re the basic unit used to calculate profit/loss.
Hint: Some brokers display a fifth decimal (a fractional pip), but for now, only observe the standard 4th decimal pip.
What are Lots in Forex Market?
Forex is traded in units called lots, not in simple rupees or dollars. A lot defines the volume or size of your trade.
In foreign exchange, a “lot” is the amount of a trade—essentially, how much money is being sold or bought. Knowing lot sizes is significant because it provides an estimate of how much financial risk (or potential profit) is associated with each price movement, which is a pip.
There are 3 types of lots:
- Standard Lot: This is 100,000 units of the base currency (the first currency in the pair). If the market moves by 1 pip, you make or lose about $10. This lot size is best suited for experienced traders with large accounts because it involves higher risk and higher potential returns.
- Mini lot: This is 10,000 units, which means each pip movement is worth about $1. It’s a good middle ground for traders who don’t want to risk too much but still want meaningful profits.
- Micro Lot: This is equal to 1,000 units, with each pip being roughly worth $0.10. This is ideal for beginners because the risk is much lower — it lets you learn and practice without losing too much money.
The bigger the lot size, the more you can lose — and the more you can win. To start with small lots is to protect yourself while you are learning.
Selecting an appropriate lot size is based on one’s risk tolerance and capital. New traders usually begin trading with micro lots to manage risk and gain experience.
How Pips, Lots & Pairs Cooperate
Let’s say:
You purchase 1 mini lot of EUR/USD at 1.1050 Later, it rises to 1.1060 — a 10 pip move Your profit = 10 pips x $1 per pip = $10
Notice how these 3 ideas are interrelated?
Where to practice this?
You can practice all of this in a risk-free demo account. A beginner-friendly broker such as Exness allows you to practice using virtual money — so you get hands-on experience without risking losing money.
You can open a free demo account here Sign up with Exness