Compared to other finical markets like stock and futures, foreign currency trading is different. Since trading is done with currency pair trades are done by using the relative value of the underlying instrument instead of the absolute value. For instance if a trader is trading the British pound, what they are really doing is trading the British pound’s relative value against a different currency. The other currency can be anyone from U.S. dollars, Swiss franc, Japanese yen or even Swedish Kroner. The ‘base’ is the first currency in a currency pair. while the second one is called the ‘quote’ currency.

Trading with currency pair is a bit trickier than trading in a traditional market with just one component to relate to. Trading in currency you are actually handling two components at the same time. When a trader decides to take a position in the currency market it is important that they evaluate the relative value of both currencies. This means that a trader must look at how a currency will increase or decrease in value compared to another currency.

photo credit: Brooks Elliott

Here is an example:
GBP/USD is one of the common currency pairs and has a lot of liquidity, meaning high value trader regularly. If a trader thinks that the British pounds will go up in value compared to U.S. dollars they will invest money in GBP/USD currency pair. In another situation, if they think that British pounds will decrease in value to U.S. dollars, then they will sell the currency pair.
Also if they think that U.S. dollar will rise against the British pound they will sell GBP/USD. This can be a bit confusing in the beginning, but it will be easier to understand by time and experience.
GBP/USD is considered to be one of the four major currency pairs, which means the most traded and therefore most liquid.

The other pairs are as follows:
USD/JPY, U.S. dollar vs. Japanese Yen
EUR/USD Euro vs. U.S. dollar
USD/CHF U.S. dollar vs. Swiss franc
Other smaller currency pairs are:
USD/CAD U.S. dollar vs. Canadian dollar
AUD/USD Australian dollar vs. U.S. dollar

As you can see the USD is paired with many currencies, but there are currency pairs that not contain USD.

These are:
AUD/NZD Australian dollar vs New Zealand dollar
CAD/JPY Canadian dollar vs. Japanese yen
EUR/JPY Euro vs Japanese yen
EUR/GBP Euro vs British pound
GBP/CHF British pound vs Swiss franc