Explaining Forex Quotes and Pips

Forex quotes are the currency exchange rates. They are always going to be quoted in pairs. The currency you find on the left is called the base currency. It is called that because it is understood to be the basis of the forex trade. The currency on the right side is called the quote, or the counter currency.

Example- GBP/USD = 1.7457

In the above example GBP (UK pound) equals 1.7457 USD (US Dollars). If you were to look at this and think that the value of the base currency will increase in value against the quote currency, then it is time to take a risk and buy up the base currency and sell off the quote currency.

One example of going long is where you purchase one currency and sell the USD simultaneously because you expect the value of the value of the foreign currency to be stronger than the value of USD. Example- EUR/USD = 1.8946 In this example you would think that the value of the Euro (EUR) would be greater then the value of the US Dollar. (USD)

Another example of going long is where you sell a foreign currency, and buy the USD simultaneously.

Example- CHF/USD = .1735 In this example you would think that the value of the CHF (swiss franc) to fall below the value of the US Dollar. (USD)

Foreign currency exchange rate quotes are also quoted at two somewhat different prices. This is commonly referred to as the Bid/Ask spread (or just the spread). On the left side is the bid price, and on the right side is the ask price. A dealer is going to be prepared to buy currency from you at the bid price. The currency's ask price is the price that the dealer is willing to sell you. Example EUR/USD = 1.4327/1.4821

You are going to lose on a deal if you purchase a lot of currency and sell it before the relative values changed. The dealer in the deal would gain in this situation. The spread between the bid and ask prices determine the commission for the forex brokers. Even if your relative values stay the same, they always profit.

Most forex quotes are quoted with four decimal places. Example-

USD/EUR = 0.8739

EUR/GBP = 0.4529

GBP/CHF = 1.8935

CHF/AUD = 1.6783

and so on....

There is however one notable exception to this among all of the major currencies. This is when JPY (Japanese yen) is in the quoted currency. When this is the case, there are only two decimal places in the forex quote. The reason for this is because the Japanese Yen is valued at about one hundredth of the US Dollar.

Example-

USD/JPY = 178.56

EUR/JPY = 165.77

and so on...

The smallest value that currencies can change is called a pip. This happens when the last decimal place has a change of 1. Between 2 and 5 pips is what the ask/bid spread usually entails. Pips have changed as much as 100 in one day, but this is unusual. Generally pips move between 20 to 50 pips a day.

In order to make a respectable profit you really need to trade with a lot of money, and different types of currency. The reason behind this is that currency changes are very small in the forex market.

For example if you decide to purchase the GBP (UK pound) in expectations that it will increase against the US Dollar. You decide to purchase 200 GBP when the quote is GBP/USD 1.3565/1.3573. 200 GBP would cost you $271.30. Suppose the GBP increases against the USD by 25 pips and the next quote is GBP/USD= 1.3590/1.3598.

Now you would want to sell your 200 GBP and buy the US Dollars. You would sell your GBP for

200 x 1.3590= $271.80 . After this trade your profit is $0.50. Even if you had purchased 1,000 GBP you would only have made $5.00 on that trade for that day.