What you will learn
- Identify the base and quote currency and read a two-way quote.
- Calculate pip value and the cost of a spread.
Reading a currency-pair quote
A currency pair prices one currency in terms of another. In EUR/USD the euro is the base currency and the dollar is the quote currency, so an exchange rate of 1.2000 means one euro is worth 1.2000 dollars.
Dealers show two prices. The bid is what the dealer pays for the base currency and the ask is what the dealer charges for it, so a long position opens at the ask and closes at the bid.
What a pip measures
A pip is the standard small price step: the fourth decimal place, 0.0001, for most pairs, and the second decimal place, 0.01, for yen pairs. Moving from 1.2000 to 1.2005 is a five-pip change.
Pip value depends on position size and is paid in the quote currency. For 100,000 units of the base currency and a 0.0001 pip, one pip is 100,000 × 0.0001 = 10 units of the quote currency, converted if your account currency differs.
The spread is a built-in cost
The spread is the ask minus the bid, usually quoted in pips. Opening and immediately closing a position loses the spread even when the market has not moved, because entry is at the ask and exit at the bid.
Spreads tend to be narrow in heavily traded pairs during busy hours and wide in less liquid pairs, around announcements and in thin markets, so two pips matter more to short-term positions.
Worked example: Round-trip cost of a spread
Illustrative quote, not live data: EUR/USD bid 1.2000, ask 1.2002. The spread is 1.2002 - 1.2000 = 0.0002, or 2 pips. A long position of 50,000 euros opens at the ask for 50,000 × 1.2002 = 60,010 dollars. Closed at the unchanged bid it returns 50,000 × 1.2000 = 60,000 dollars. The 10-dollar gap equals 2 pips × 5 dollars per pip.
Check your understanding
A yen pair shows a bid of 150.00 and an ask of 150.03 (illustrative). What is the spread in pips, and what does an immediate round trip cost on 100,000 units, in yen?
Show answer and explanation
A yen pip is 0.01, so the spread is 0.03 ÷ 0.01 = 3 pips. The cost is 0.03 yen per unit, so 100,000 × 0.03 = 3,000 yen before any commission.