Forex Quotes and Pips
Currencies cannot be traded in isolation. Instead they are traded against each other in pairs. Therefore when you get a Forex quote from your Forex broker there will always be two currencies quoted against each other.
The first currency is known as the ‘Base’ currency. The second is the ‘Quote’ currency. This is also sometimes referred to as the ‘counter currency.’ When we refer to currencies on the Forex markets we refer to the trading pair, EUR/USD for example.
The Format of a Forex Quote
Each pair of currencies in a Forex quote is given in the following format of XXX/YYY; where XXX and YYY denote the ISO 4217 international three-letter code of each of the currencies.
The first of the two letters of the Forex quote identifies the name of the currency’s’ country of issue. The third letter identifies the international name attributed to the currency. For example:
For example: USD = US (United States) D (Dollar)
In a Forex quote you will also be given the current rate of exchange. This number is known as the exchange rate quote. This tells us how many units of the base currency (the first currency) it takes in order to purchase one unit of the quote currency (the second currency).
You will notice when looking at a Forex quote that in actual fact, two numbers are given after the currency pair. The first number is the ‘bid’ price. This is the rate that you buy from the broker. The second number is the ‘ask’ price. This is the rate that you sell back to the broker.
The first is the Bid Price. This is the price that the market is prepared to buy a specific currency pair for on the Forex markets. For the Forex trader this is the ‘sell’ price of the quote currency. In the example above the the bid price is 1.23829. This means you can sell one Euro for 1.23829 dollars.
The second price quoted is the Ask Price. This is the price that the market is currently prepared to sell a currency pair for in the Forex market. In the above example this is 1.23849. This means you can buy one Euro for 1.23849.
The difference between the two prices in a Forex quote is known as the bid/ask spread or if you like, the buying and selling price.
The spread on a particular currency pair will vary from broker to broker although typically will tend to be less than 0.1%. You will often see brokers quoting minimum spread sizes. Expect the spread to be anywhere between 1-3 pips although expect the broker to raise these during illiquid markets unless they guarantee ‘fixed spreads.’
A broker providing a Fixed spread will guarantee that the price you buy and sell from the Broker will not change, whatever the market conditions.
The spread is also sometimes referred to as the transaction cost as it is this spread that the Forex broker keeps as commission for executing the deal.
Pips
A Pip is a term used in Foreign Currency Markets to represent the smallest increment of measurement of a currency. ‘Pip’ actually stands for ‘Percentage in Point’ with one ‘pip’ itself being worth 1/100th or 1 per cent of the value of the underlying currency. Therefore the actual weighted value of a Pip differs, being dependant on the underlying Currency’s value.
Thankfully Forex Brokers work out the exact value of each Pip. Therefore each decimal ‘tick’ up or down you see in a quoted currency pair is referred to as ‘one Pip.’
For example, if the EUR/USD moves from 1.4500 to 1.4505 it would be said to have moved ’5 pips.’
Forex Traders use Pips to measure profit and loss on their accounts rather than absolute currency amounts. By using pips to calculate profit and loss it is easy to compare performance between trading strategies and systems, as well as between traders themselves
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