Module 1A: Forex Foundations · Lesson 2 of 4 · Back to course
In forex you never buy “the pound” on its own. You always trade one currency against another, so prices are quoted in pairs, such as GBP/USD or EUR/GBP. This lesson explains how to read a pair, the main groups of pairs, and why your choice of pair affects how much each trade costs you.
How to read a currency pair
Take GBP/USD = 1.2650.
- The first currency (GBP) is the base currency.
- The second currency (USD) is the quote currency.
- The price tells you how much of the quote currency buys one unit of the base currency. Here, £1 buys $1.2650.
So:
- Buying GBP/USD means you expect the pound to strengthen against the dollar (the number goes up).
- Selling GBP/USD means you expect the pound to weaken against the dollar (the number goes down).
A rising GBP/USD doesn’t tell you why. The pound might be strengthening, or the dollar might be weakening, or both. That matters later, when we look at correlations.
Bid, ask and spread
Your platform shows two prices, for example 1.2649 / 1.2650. You sell at the lower bid and buy at the higher ask. The gap is the spread – here 1 pip – and it’s a cost you pay on every trade.
Pips: the unit of measurement
For most pairs, a pip is the fourth decimal place: a move from 1.2650 to 1.2651 is 1 pip. For pairs that include the Japanese yen, it’s the second decimal place: USD/JPY moving from 150.25 to 150.26 is 1 pip. Many platforms show an extra digit (a “pipette”, or tenth of a pip).
With UK spread bets, one “point” on a currency pair is usually the same as one pip, and you choose a stake in £ per point. With CFDs, you trade in lots or units, and the pip value depends on the pair and the size.
The main groups of pairs
| Group | What it means | Examples | Typical spreads |
|---|---|---|---|
| Majors | The US dollar against another heavily traded currency | EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD | Usually the tightest |
| Crosses / minors | Two major currencies, neither of them the US dollar | EUR/GBP, GBP/JPY, EUR/JPY, AUD/NZD | Often a little wider |
| Exotics | A major currency against a smaller or emerging-market currency | USD/TRY, USD/ZAR, EUR/PLN, USD/MXN | Much wider, with bigger jumps |
Different sources use “minor” and “cross” slightly differently. Don’t worry about the labels. What matters is liquidity: the more a pair is traded, the tighter its spread tends to be and the smoother its price usually moves.
A UK twist: “major” means something specific for leverage
The FCA’s retail leverage limits use their own definition. For leverage purposes, a major currency pair is any pair made up of two of these: USD, EUR, JPY, GBP, CAD, CHF. Those get a maximum leverage of 30:1. Other pairs – including AUD/USD and NZD/USD, which traders usually call “majors” – are limited to 20:1 for UK retail clients. We explain the limits in UK leverage limits and margin rules.
Nicknames you’ll hear
- Cable – GBP/USD. The name comes from the telegraph cable laid under the Atlantic in the 1800s, which carried the exchange rate between London and New York.
- Fibre – EUR/USD.
- Loonie – the Canadian dollar (after the loon bird on its one-dollar coin).
- Aussie and Kiwi – the Australian and New Zealand dollars.
- Swissie – the Swiss franc.
What a pip is worth in pounds
Your account is in pounds, but a pip’s value is fixed in the quote currency. If the quote currency isn’t GBP, its value in pounds moves with the exchange rate.
Illustrative figures for a CFD position of 1 standard lot (100,000 units of the base currency):
| Pair | Pip value in the quote currency | Value in £ (example rate) |
|---|---|---|
| EUR/GBP | £10 | £10.00 (quote is already GBP) |
| GBP/USD | $10 | £7.91 if GBP/USD is 1.2650 ($10 ÷ 1.2650) |
| EUR/USD | $10 | £7.91 at the same GBP/USD rate |
| USD/JPY | ¥1,000 | £5.27 if GBP/JPY is 189.80 (¥1,000 ÷ 189.80) |
With a spread bet you avoid most of this maths: £2 per point is £2 per pip on any pair, because the provider handles the conversion. (Check your provider’s contract details – some quote certain markets differently.)
Why the pair you choose affects your costs
All figures are made up for teaching purposes. They aren’t real spreads or a trade idea.
Suppose you spread bet at £2 per point and plan to risk £40 on each trade, with a 20-point stop.
- On a major pair with a 1-point spread, the spread costs £2 per trade – 5% of your risk.
- On a cross with a 3-point spread, it costs £6 – 15% of your risk.
- On an exotic pair with a 40-point spread, it costs £80 – twice your entire planned risk. With a 20-point stop, you’d be stopped out almost straight away.
Over 200 trades a year, the difference between a 1-point and a 3-point spread at £2 per point is £800. Spreads also usually widen at night, around big news and at the Sunday open.
Common mistakes
- Reading the pair backwards. Selling EUR/GBP is a bet that the pound strengthens against the euro, not the other way round.
- Ignoring the quote currency. Pip values on non-GBP pairs change in pounds as exchange rates move.
- Trading exotics because they “move more”. Bigger moves usually come with much bigger spreads and sudden gaps.
- Assuming all “majors” get 30:1 leverage. Under UK retail rules, AUD/USD and NZD/USD don’t.
The prop firm angle
Forex prop challenges usually offer a long list of pairs. Stick to one or two liquid pairs you’ve practised on demo. A single exotic trade with a wide spread or a sudden gap can use up a big slice of a daily loss limit before your idea has even had a chance to work. Check the firm’s contract sizes too: some quote lots differently from your demo broker.
Key takeaways
- A pair shows how much of the quote currency buys one unit of the base currency.
- Majors include the US dollar and are usually cheapest to trade; crosses don’t include the dollar; exotics are usually expensive and jumpy.
- A pip is usually the fourth decimal place (the second for yen pairs).
- The spread is a cost on every trade – pick pairs where it’s small compared with your stop.
Quick quiz
- In EUR/GBP, which is the base currency? (EUR.)
- GBP/USD moves from 1.2650 to 1.2690. How many pips is that? (40 pips.)
- What’s “cable”? (GBP/USD.)
- Under UK retail rules, what’s the maximum leverage on AUD/USD? (20:1, because AUD isn’t in the FCA’s list of major currencies.)
- You spread bet £3 per point on a pair with a 2-point spread. What does the spread cost you? (£6.)
Key terms
Base currency · Quote currency · Major pair · Minor pair · Cross pair · Cable · Pip · Spread · Lot · Stake per point
Try this
On a demo account, write down the spread on five pairs at 10:00 UK time on a weekday: EUR/USD, GBP/USD, EUR/GBP, GBP/JPY and one exotic pair. Then check the same five at 22:30 UK time. Work out what each spread would cost at £1 per point. Keep the two or three cheapest pairs as your practice shortlist.
FAQ
Which currency pair is best for beginners? We don’t recommend specific markets. Many beginners practise on a liquid major pair with a small spread because costs are lower and price tends to move more smoothly. Whatever you pick, stick to one or two at first.
Why is GBP/USD sometimes so volatile? UK and US news both affect it, including inflation data, jobs data and interest rate decisions. See Economic data that moves markets.
What’s the difference between a pip and a point? On currency pairs with UK spread betting firms, they’re usually the same thing. On indices, a “point” is a whole index point. Always check the contract details.
Disclaimer: This page is general education, not financial or investment advice or a personal recommendation, and it doesn’t take your circumstances into account. Examples are hypothetical, for illustration only, and not an invitation to buy or sell. Learning a strategy doesn’t guarantee profits. Past performance is not a reliable guide to future results. Futures, spread bets and CFDs are complex and carry a high risk of losing money quickly because of leverage, and most retail traders lose money. With a real futures account, losses can exceed your deposit. Only trade with money you can afford to lose, and speak to an independent FCA-authorised adviser if you’re unsure. Read our full risk warning.