Every forex trade involves two currencies — one being bought and one being sold simultaneously. The pair notation and the price attached to it tell you exactly how those two currencies relate to each other at any given moment. Understanding how to read a currency pair and its price is the first practical skill every trader needs.
What Is a Currency Pair?
A currency pair is a price quotation of the exchange rate for two different currencies traded in the forex market. When you buy a currency pair, you are buying the first currency (the base) and simultaneously selling the second currency (the quote). When you sell a currency pair, you are selling the base and buying the quote.
You never trade a single currency in forex. Every trade is a simultaneous exchange — you are always buying one currency and selling another at the same moment.
Base and Quote Currency
The base currency is always the first currency listed in the pair. The quote currency is always the second. In [EUR/USD], the euro is the base currency and the US dollar is the quote currency. In [USD/JPY], the dollar is the base and the yen is the quote.
EUR/USD = 1.0850 means: 1 euro buys 1.0850 US dollars. If EUR/USD rises to 1.1000, the euro has strengthened — it now buys more dollars than before. If EUR/USD falls to 1.0700, the euro has weakened — it buys fewer dollars.
How to Read a Forex Price
Forex prices are quoted to four or five decimal places for most pairs. The fourth decimal place is one pip — the standard unit of price movement. The fifth decimal place (if shown) is a pipette — one tenth of a pip — used for more precise pricing.
For Japanese yen pairs — such as [USD/JPY] — the convention is different. Because the yen has a much lower value per unit, these pairs are quoted to two decimal places, and one pip is the second decimal place (0.01).
Bid and Ask Price
Every currency pair has two prices quoted simultaneously — the bid and the ask. The bid is the price at which the market will buy the base currency from you — the price you receive when you sell. The ask is the price at which the market will sell the base currency to you — the price you pay when you buy.
Bid: 1.0849 | Ask: 1.0851 The spread (difference) = 0.0002 = 2 pips. If you buy at 1.0851 and the price rises to 1.0871, you have gained 20 pips. If the price falls to 1.0831, you have lost 20 pips.
Calculating Profit and Loss
Your profit or loss on a forex trade is determined by three factors: the direction of the price move, the size of that move in pips, and the size of your position in lots.
For a standard lot (100,000 units) of EUR/USD, one pip is worth approximately $10. For a mini lot (10,000 units), one pip is worth approximately $1. For a micro lot (1,000 units), approximately $0.10. You will learn exactly how to calculate pip value in Course 03 — Junior Trader.