How Forex Quotes Work: Currency Pairs, Pips and Spreads

Educational content only. This explainer covers how currency quotes work. It contains no forecasts or trading signals and is not financial advice. Leveraged currency trading carries a high risk of loss.

The foreign exchange (forex) market is where currencies are exchanged for one another. It is the largest financial market in the world and trades almost continuously from Monday morning in Asia to Friday evening in New York. Every exchange rate you see in the news is a price of one currency in terms of another, and once you know how a quote is written, the rest falls into place.

Reading a currency pair

Currencies are quoted in pairs such as EUR/USD. The first currency is the base, the second is the quote currency. The price tells you how many units of the quote currency one unit of the base currency buys. If EUR/USD rises, the euro is strengthening against the dollar; if it falls, the dollar is strengthening against the euro.

• Majors are pairs that include the US dollar and another widely traded currency, such as EUR/USD, USD/JPY, GBP/USD and USD/CHF.
• Crosses are pairs without the dollar, such as EUR/GBP or EUR/JPY.
• Exotics pair a major currency with one from a smaller or emerging economy, and usually cost more to trade.

Bid, ask and spread

A broker or bank shows two prices: the bid, at which you can sell the base currency, and the ask, at which you can buy it. The ask is always a little higher. The difference is the spread, and it is one of the main costs of trading. Spreads are usually tightest in the most liquid pairs and during the busiest hours, and they can widen sharply around major news releases.

Pips and lots

A pip is the standard unit for small price changes. For most pairs it is the fourth decimal place; for pairs involving the Japanese yen it is the second. Trade size is often expressed in lots, where a standard lot is 100,000 units of the base currency, with mini and micro lots being smaller fractions. The value of one pip depends on the pair and the trade size.

What moves exchange rates

Interest rates and central banks

Money tends to flow towards currencies that offer higher interest rates, so expectations about central bank decisions are the single biggest driver of major pairs. Statements from the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan are watched word by word.

Economic data

Inflation, employment, growth and business-survey figures change expectations about future interest rates. A surprise relative to forecasts matters more than the figure itself.

Risk sentiment and trade

In calm markets investors take more risk; in stressed markets they often buy currencies seen as safe havens, such as the US dollar, the Swiss franc and the yen. Trade balances, commodity prices and political events also shape longer trends.

The trading day

Forex activity moves around the globe in overlapping sessions: Sydney and Tokyo, then London, then New York. The overlap of London and New York is usually the most active period. Liquidity is thinner late on Friday and around holidays, when prices can jump more easily.

A word on leverage

Retail forex is commonly traded with leverage, which lets a small deposit control a large position. Leverage magnifies losses exactly as much as gains, and many retail accounts lose money. Understanding quotes is the first step; understanding risk per trade is the essential second one. A trading journal helps you see how much you actually risk.