Forex: pairs, prices and pip values

Lesson 1 · 8 min

Understanding currency pairs

A currency trade is a price between two currencies. The first name in the pair is the base. The second is the quote, the currency used to express the price. EUR/USD = 1.1000 means one euro is quoted at 1.1000 dollars under that convention. If the same pair is later observed at a higher rate, the euro strengthened against the dollar between those two observations. It does not, by itself, say the euro strengthened against every other currency.

Some markets also publish the inverse. If one euro is 1.1000 dollars, one dollar is 1 / 1.1000 euros, about 0.9091, before any spread. The inverse is a different quotation of the same relationship, not a second market fact. Retail screens usually show a conventional order, such as EUR/USD rather than USD/EUR, because that is how the price is customarily quoted. The convention is not a rule that every product must follow.

Two currencies are involved because the price is an exchange, not a price in a third unit. Your account currency can be a third currency. That is a conversion problem, covered when the pip value is calculated. It does not change which currency is the base. An equity index is a different subject. Index benchmarks cover that calculation and the products that refer to it.

Lesson 2 · 8 min

How forex prices are quoted

A two-way price has a bid and an ask. In the usual immediate deal, the bid is the price at which the quoting side buys the base currency, and the ask is the price at which it sells the base. A customer who buys the base pays the ask. A customer who sells the base receives the bid. The spread is the ask minus the bid. The midpoint is the average of the two. The midpoint is a useful illustration. It is not a third price you can demand.

An illustrative EUR/USD quote of 1.0998 bid and 1.1000 ask has a spread of 0.0002. Under a pip of 0.0001, that is 2 pips. These are typed levels for the lesson. They are not a quote that is open now, and a platform can show more or fewer decimal places. A fifth decimal on a non-yen pair is often called a pipette, one tenth of the 0.0001 pip. A yen pair is often quoted with a pip of 0.01 and a pipette of 0.001. Those are conventions. A contract can define its increment differently, and the definition in the contract wins.

Glossary: bid, ask and spread.

Lesson 3 · 10 min

From a pip movement to cash

A pip is a price increment, not a sum of money. The quote-currency value of one pip is the position size in base units multiplied by the pip size. For 10,000 euros in EUR/USD, with a pip of 0.0001 dollar per euro, one pip is 1 dollar. A move of 25 pips is 25 dollars before any other cost, when the account is already in dollars. For 100,000 base units the same pip is 10 dollars. For 100,000 dollars in USD/JPY, with a pip of 0.01 yen, one pip is 1,000 yen. That 1,000 is yen. It is not 1,000 dollars.

If the account currency is not the quote currency, the quote-currency pip value has to be converted. This page uses account-currency units per one quote-currency unit, the same rule as the forex position calculator. If you do not type that rate, the quote-currency result stays on screen and the account-currency result is left blank. No rate is invented, and no live rate is fetched.

Lesson 4 · 8 min

Position sizes, lots and monetary risk

The size of a spot position is a number of base-currency units. A common teaching convention calls 100,000 units a standard lot, 10,000 a mini lot and 1,000 a micro lot. That convention is not a law, and a contract-for-difference or a listed currency future can use a different unit. The notional in the quote currency is units times the price. At an illustrative 1.1000, 10,000 euros is 11,000 dollars of quote-currency notional.

A risk budget is a cash amount you decide before the trade, often a small share of account capital. The stop distance, in pips, times the value of one pip, is the cash at risk if the stop is filled at that distance and no other cost is added. A wider stop needs a smaller size to keep the same cash risk. The forex position calculator does that division from figures you type. This lesson does not choose the budget for you.

The forex position calculator is the same engine as the explorer above. Its route is not in the public directory.

Lesson 5 · 7 min

Forex trading sessions and market activity

There is no single foreign-exchange exchange and no opening bell that starts the world market. Banks, platforms and other liquidity providers quote through the week, and activity tends to be heavier when a major centre’s banking day is underway. Sydney, Tokyo, London and New York are the centres usually named in teaching material. The busiest stretches are often the overlaps, especially London with New York. A bank holiday in one centre can thin that region without closing every other quote.

Daylight saving does not change on the same weekend in every country. A fixed diagram of “London 8 to 5 UTC” is therefore wrong for part of the year. The sketch below is labelled as a representative UTC illustration. It is not a timetable, and it does not report whether a session is open now.

Lesson 6 · 8 min

Spreads, commissions and rollover

The spread is paid in the price: you buy the base higher than you can sell it at the same moment. Some firms also charge a commission, in money, per trade or per unit. If the profit currency is not the account currency, converting it is another cost or another rate. None of those figures is printed here as a firm’s fee. Use the schedule of the firm you are reading.

Holding past the firm’s rollover time can add or subtract a financing amount, often called a swap. The sign depends on the two interest rates in the pair and on the firm’s own charge. Some products apply a triple charge to cover a weekend. That is a product rule, not a feature of every currency trade. A listed currency future is a different instrument: it has an exchange, a clearing house, an expiry and a futures price that can differ from the spot rate. Its costs are commission, exchange fees and the futures basis, not a retail spot swap, unless the contract says otherwise.

The fees guide separates these lines for other instruments as well.

Lesson 7 · 7 min

Economic news and a currency

A release has at least two numbers that matter: the figure that was published, and the figure that had been expected. The surprise is the actual minus the expected. A higher-than-expected inflation print, a payrolls figure, or a policy rate can matter because it changes what people infer about interest rates. A currency pair relates two of those markets, so the same print can matter differently for each side of the pair.

A strong headline does not dictate the next rate. The result may already have been anticipated, the previous month may be revised, or another release may dominate the same hour. The explorer uses the macro pathway’s surprise arithmetic on figures you type. It does not load a calendar and it does not forecast a currency.

Macroeconomics research keeps the same distinction between a print and a surprise.

Lesson 8 · 9 min

A hypothetical forex plan

A plan names the pair, the direction, the entry, the stop, the number of base units, the cash risk and the costs you can already see. The cash risk is the stop in pips times the pip value, plus the spread and any commission you include. If the account currency is not the quote currency, the conversion is a rate you type. Leave it blank rather than invent one.

Leverage changes how much capital is posted. It does not cap the loss if the price gaps through the stop. Related pairs can lose together, so two small risks are not automatically two independent risks. None of this is a signal, and finishing the form is not permission to place an order.

Controlling a trading loss is the foundations note on the same idea.

Knowledge check

Questions on pairs, quotes, pips and sessions. A missed choice points back to the lesson. The count is not stored.

Learn, calculate, review

• Position sizeA cash risk budget divided by the distance to a stop.
• Risk and rewardA ratio from distances you type. Not a probability.
• Profit and lossA hypothetical result from entry, exit and size.
• Trading journalA record that stays under your own privacy choices.
• Trading performanceA reading of records you already keep. Not a forecast.
• Economic calendarA list of releases. It does not predict the print.

The position explorer on this page uses the same pip study as the forex position calculator. That calculator route is not in the public directory.

Terms

• Bid
• Ask
• Spread
• Liquidity
• Market order