Currency pair trading is when you use leverage to borrow funds in order to open a larger position with a smaller amount of funds known as free margin. For example, if you open a $5,000 position in XBT/USD with 5:1 leverage, only one-fifth of this amount, or $1000, will be tied to the position from your balance. Your remaining balance will be available for opening more positions unless your position goes into a negative p/l. If you open this same position with 2:1 leverage, $2,500 of your balance will be tied to the position. The used balance for your position is also known as used margin.
Using leverage you can go long and short since you are borrowing funds for the position. If you select a level of leverage in the order form, you are no longer creating an order to exchange on spot in your account. Currency will still be traded on Kraken as a result of the order, but in your account you will be opening a long or short CPT position. Click here for further information on leverage trading.
The above is an example of exchanging EUR for XBT while below is an example of currency pair trading by using 5:1 leverage in order to go long on XBT against EUR.
Below is an example of what it looks like if you were to long XBT against USD on 5:1 leverage using $1000 worth of margin. In order to create this position you are not required to hold $1000 in USD, but instead can hold the $1000 worth in any collateral currency.