Understanding FX currency pairs
A currency pair like GBP/USD shows how many US dollars are needed to buy one British pound. If GBP/USD = 1.2500, this means 1 British pound = 1.25 US dollars.
- The first currency (GBP) is the base currency
- The second currency (USD) is the quote currency
If the pair rises, the base currency is strengthening against the quote currency.
Understanding pips
In most currency pairs, one pip = 0.0001. For example:
- If EUR/USD moves from 1.0870 to 1.0880, that is a 10 pip move
- If it moves from 1.0870 to 1.0873, that is a 3 pip move
Pip calculations are essential for understanding profit and loss.
Floating profit and loss
Your floating (unrealised) P&L changes as the market moves. If you open a buy position and the price falls, you will have a floating loss. If the price rises, you will have a floating gain. Until the trade is closed, the profit or loss is unrealised.
Market direction and strength
Always think in terms of the base currency relative to the quote currency:
- If the euro strengthens against the US dollar, EUR/USD will rise
- If the euro weakens against the US dollar, EUR/USD will fall
Leverage: profits and losses
Leverage allows you to control a larger position with a smaller deposit (margin). It is important to understand that leverage magnifies both profits and losses, it does not only increase gains. If the market moves against you, losses are also amplified. This is one of the main risks of spread betting and CFD trading.
Explore more in our related guides:
- What are CFDs? – What CFDs are, how they differ from owning assets outright, and what drives the cost of trading.
- Risk management – Key tools and concepts to help protect your capital, from stop-loss orders to margin requirements.