Trading Guides: Understanding Currency Pairs
FOREX (Short for Foreign Exchange) refers to the global activity where investors, institutions and banks exchange (buy and sell) currencies.
Forex is one of the largest trading markets, Online trading takes place over an online channel called the ‘interbank market’ where currencies are
traded 24 hours a day, five days a week. The Forex market has a global turnout volume that almost exceeds US$5 trillion on a daily basis.
All transactions made on the forex market involve the immediate buying and selling of two currencies. In Forex Markets, Traders always deal
with two currencies together, called currency pairs. You will always see two currencies in the format of EUR/USD.
For the case of EUR/USD: You exchange EURO for US Dollar.
For the case of EUR/GBP: You exchange EURO for Great British Pound.
Currency pairs include a base currency and a quote currency. The display below shows the forex pair EUR/USD (Euro/US Dollar), one of the
most common currency pairs used on the forex market.
Below we are giving an example of a currency pair and explaining what the different numbers and values mean. Based on the example below,
it will cost a trader 1.0916 USD to buy 1 EUR. Alternatively, a trader could sell 1 EUR for 1.0916 USD.
The first currency which appears in the currency pair is called the Base Currency.
This currency is bought or sold in exchange for the Quote currency.
The second currency which appears in the currency pair is called the Quote Currency.
The Bid Price is the price at which the trader is willing to buy a currency pair. The bid price is given in real-time and is constantly being updated.
The Ask Price is the price at which the trader will sell the currency.
It is also given in real-time and constantly being changed, driven by market demand as well as various political and economic factors.
The Spread indicates the cost of trading which is the difference between the Ask price and the Bid price.
For example, if the Euro to US dollar is trading with an Ask price of 1.16182 and a Bid price of 1.16184, then the spread will be the ask
price minus the bid price.
In this case, 0.0002 pips.
A Point In Price – or PIP for short – is the measure of change in a currency pair’s price.
This acronym can also stand for ‘Percentage In Point’ and ‘Price Interest Point’.
A PIP is used to measure price movement, and it represents a change in a currency pair’s price.
Most currency pairs are quoted to five decimal places.