Traders in the foreign exchange market speculate on the exchange ratio between two currencies. The exchange rate expresses the relationship of the base currency in terms of the second currency. In the GBP/USD exchange rate of 1.9780, a person can exchange 1 GBP for 1.9780 USD. The GBP is the base currency in this currency pair. In the USD/JPY exchange rate of 121.00, a person can exchange 1 USD for 121.00 JPY. The USD is the base currency in this currency pair.

When conducting foreign exchange transactions, a customer must buy one currency while simultaneously selling another. If you own dollars and want to own pounds instead, then you must sell your USD in order to buy an equivalent amount of GBP. If a speculator buys GBP and sells USD, in trader terminology buy GBP/USD, and the exchange rate at the time of purchase is 1.9780, then the traders account will look this way:

A few hours pass and the GBP/USD exchange rate is now 1.9880. The trader wishes to convert his pounds back to dollars. The account will look this way:

This trader made a profit of USD 1000 by exchanging his USD for GBP and then back to USD through the foreign exchange market. The trader correctly anticipated that the value of the dollar would fall against the pound. In another example, this trader wants to exchange his dollars for Swiss francs:

This trader incorrectly thought the value of the USD was going to decrease relative to the value of the CHF. The USD/CHF exchange rate went from 1.2140 to 1.2210 during the duration of this trade. This trader lost USD 573.30 in this trade.