Currency Pair Quotes: the "Pips" and "Spread" Concepts

Currency pairs and the exchange rate

On the forex exchange, currencies are quoted in pairs. The most traded currency cross is the euro against the dollar (EUR/USD). The base currency is always the left one (EUR) against the right one (USD) which is called the quote currency. During a transaction on the EUR/USD, we buy or sell euros (base currency) and the method of payment is the dollar (quote currency).

The exchange rate is the price of one unit of the base currency in terms of the quote currency. For example, when EUR/USD = 1.4050, that means that 1 euro = 1.4050 dollars.

The pip

The smallest increment of variation is a pip, it is the fourth number after the decimal, except for pairs with the yen, in which case the pip is the third number after the decimal. Sometimes the broker display prices with fractional pips (5 digits after the decimal point and 4 for pairs with the yen such as the USD/JPY).

The spread

Prices are always shown with two quotations: EUR/USD = 1.4050/1.4052. The price on the left is what you can sell it for (BID), the price on the right is what you can buy it for (ASK).

The difference between the BID and ASK prices is called the spread (2 pips in our example). The spread is what the broker collects as compensation.