How a currency pair is quoted

The two names, and their order 

Every currency quotation names two currencies, and the order they appear in is not decorative. The first is the base currency. The second is the quote currency, also called the counter currency. The number attached to them states how much of the quote currency is required to obtain exactly one unit of the base. The base is always one unit and that one is never written down, which is why a quotation looks like a single number even though it is describing a ratio.

One consequence governs every reading of a chart. A rise in the number means the base currency has strengthened against the quote currency, because more of the quote currency is now needed for one unit of the base. A fall means the opposite. The direction of the number is always a statement about the base, never about the quote, so the same dollar move reads as a rise in one pair and a fall in another purely according to which side the dollar is on.

The ordering is fixed by market convention rather than by arithmetic. There is an informal hierarchy that decides which of two currencies is written first, running from the euro, through the pound, the Australian dollar and the New Zealand dollar, to the US dollar, and then the Canadian dollar, the Swiss franc and the yen. It settles why the euro is the base in EUR/USD while the dollar is the base in USD/JPY, and it is why nobody quotes JPY/USD: the reciprocal exists arithmetically and is simply not how the market writes it.

Direct and indirect quotation 

The same rate can be written two ways, and the two conventions have names that are only meaningful relative to a home currency. A direct quotation states the domestic currency per unit of the foreign one. An indirect quotation states the foreign currency per unit of the domestic one. Each is the reciprocal of the other, so neither carries more information, and confusion arises only when a figure is quoted without its convention attached.

The distinction matters most when a rate is quoted in ordinary language rather than as a pair. A statement that a currency is worth a certain amount and a statement that a certain amount buys one unit of it are inverse claims, and one of them moves up when the other moves down. Written as a pair, with the base first, the ambiguity disappears, which is the reason the convention exists.

Why there are always two prices 

A currency pair is never quoted as a single number by anyone willing to deal in it. It is quoted two ways at once. The bid is the price at which the quoting institution will buy the base currency, and therefore the price at which the pair can be sold to it. The offer, also called the ask, is the price at which it will sell the base currency, and therefore the price at which the pair can be bought from it. The offer is always the higher of the two.

The difference between them is the spread. It is not a fee charged after the fact and it does not appear as a line on a statement: it is built into the two prices, which is why a position opened at the offer and closed immediately at the bid returns slightly less than it cost. The spread is the compensation a quoting institution takes for standing ready to deal on both sides, and it widens and narrows with how much risk that carries at the time.

Because there are two prices, a single reference number has to be constructed for any purpose that needs one, and the convention is the mid: the bid and the offer averaged. Charts are frequently drawn on the mid or on the bid, which is why the last price on a chart and the price at which a purchase can actually be made are not the same number, and why the difference is not an error.

Decimals, pips and the big figure 

Most currency pairs are quoted to four decimal places, and the fourth decimal is the pip: the smallest increment the market conventionally counts. Pairs quoted against the Japanese yen are the standing exception. Because one yen is worth a small fraction of a dollar, a yen pair is quoted to two decimals and its pip is the second decimal place, one hundredth rather than one ten-thousandth.

Many venues show one further digit, a fifth decimal on an ordinary pair and a third on a yen pair. That digit is a tenth of a pip and is conventionally called a fractional pip or a pipette. It is a finer increment of the same scale rather than a new unit, so a move confined to that last digit is a move of some number of tenths of a single pip, and quoting it as though it were a pip count overstates the move tenfold.

The leading digits of a quotation change slowly and are called the big figure, or the handle. Dealers routinely omit them in conversation and quote only the last two digits, on the understanding that everyone involved already knows the handle. A quotation given as fifty five, sixty is a statement about pips, and the two or three digits in front of it are assumed rather than absent.

Reading a full quotation 

Turning a pip into money 

A pip is a movement in a rate, not an amount of money, and it becomes an amount only once it is multiplied by the size of a contract. Contract size in currency CFDs is stated in lots, and a standard lot is conventionally one hundred thousand units of the base currency. The pip size multiplied by the number of units gives the value of one pip, and that value is expressed in the quote currency.

Two adjustments follow from that. When the quote currency is not the account's currency, the amount is converted at the prevailing rate, so the money value of a pip on such a pair moves as that rate moves. And when the quote currency is the account's currency, the value of a pip is fixed by the contract size alone and does not change as the pair moves, which is why the arithmetic feels simpler on some pairs than on others.