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Lesson 2 of 10 · Free

Forex Basics: Currency Pairs, Pips and Spreads

Learn how currency pairs are quoted, what base and quote currencies are, and how to calculate pips, pip value and the spread.

Author: Moustafa HijaziContent reviewed: 2026-10-304 min readSelf-study course

What you will learn

  • How to read a currency pair, including base and quote currency.
  • What a pip is and how to calculate pip value.
  • What the bid/ask spread is and why it is a cost.
  • Which pairs are called "majors" and how trading sessions work.

Explanation

A currency pair shows the price of one currency in another. In EUR/USD = 1.1000, the first currency (EUR) is the base currency and the second (USD) is the quote currency. The price means: 1 euro costs 1.1000 US dollars.

If EUR/USD rises, the euro is getting stronger against the dollar. If it falls, the euro is getting weaker.

A pip (often explained as "percentage in point") is the standard small unit of price change. For most pairs a pip is the fourth decimal place: 0.0001. For pairs quoted against the Japanese yen (JPY), such as USD/JPY, a pip is the second decimal place: 0.01. Many platforms show one extra digit, called a fractional pip or "pipette".

Pip value depends on your position size. Position size is often measured in lots: a standard lot is 100,000 units of the base currency, a mini lot is 10,000 and a micro lot is 1,000. For EUR/USD, one pip on a mini lot = 10,000 × 0.0001 = $1. The pip value is in the quote currency (here USD).

A broker shows two prices. The bid is the price at which you can sell. The ask (or offer) is the price at which you can buy. The difference is the spread. You buy at the higher price and sell at the lower price, so every trade starts slightly negative.

Major pairs are the most traded pairs that include the US dollar, for example EUR/USD, USD/JPY, GBP/USD (British pound), USD/CHF (Swiss franc), AUD/USD (Australian dollar), USD/CAD (Canadian dollar) and NZD/USD (New Zealand dollar). They usually have tighter spreads than less traded pairs.

Forex trades around the clock on weekdays, across overlapping trading sessions: Asia (Tokyo, Sydney), Europe (London, Frankfurt) and North America (New York). Liquidity (how easily you can trade without moving the price) is often highest when the European and US sessions overlap. Spreads can widen at quiet times and around major news.

Risk warningRetail forex trading is often done with leveraged products such as CFDs (contracts for difference). Leverage means a small price move creates a large gain or loss relative to your deposit. You can lose money quickly. EU rules require CFD providers to show a risk warning with the percentage of their retail accounts that lose money; read it before trading.

Worked example

Hypothetical example: a trader buys 1 mini lot (10,000 EUR) of EUR/USD. Quotes: bid 1.1000, ask 1.1002. Excluded: commissions, overnight financing and taxes.

  1. Spread: 1.1002 − 1.1000 = 0.0002 = 2 pips. Cost of the spread: 2 × $1 = $2.
  2. The trader buys at the ask: 1.1002.
  3. Later the quotes are bid 1.1040, ask 1.1042. To close a buy position, the trader sells at the bid: 1.1040.
  4. Gain in pips: 1.1040 − 1.1002 = 0.0038 = 38 pips.
  5. Gain in dollars: 38 × $1 = $38.

Notice that the bid moved 40 pips (1.1000 to 1.1040), but the trader made only 38 pips because of the 2-pip spread.

Common mistake

Forgetting which price you trade atBeginners often look at one price on the chart and assume they can buy and sell there. Charts usually show the bid. You buy at the ask and sell at the bid, so the spread is always paid, and it can widen sharply around news.

Practice activity

On paper: USD/JPY quotes are bid 150.00, ask 150.03. You buy 1 mini lot (10,000 USD). What is the spread in pips? Later you sell at a bid of 150.50. How many pips did you gain, and what is the gain in yen? (One pip on a mini lot of USD/JPY = 10,000 × 0.01 = ¥100.) Ignore fees.

Show solution

Spread: 150.03 − 150.00 = 0.03 = 3 pips. Gain: 150.50 − 150.03 = 0.47 = 47 pips. Gain in yen: 47 × ¥100 = ¥4,700.

Limitations: to know the result in euros you must convert the yen at the current EUR/JPY rate, and real costs include financing and possible commissions.

Key takeaways

  • In a pair, the first currency is the base and the second is the quote.
  • A pip is usually 0.0001 (0.01 for yen pairs); pip value grows with position size.
  • You buy at the ask and sell at the bid; the spread is a cost on every trade.
  • Leveraged forex products can lose money quickly.

Next step

In the next lesson you will see why central banks and interest rates are among the strongest drivers of currency prices.

Self-check

Answer the questions, then check your answers. You can retry as often as you like.

1. In GBP/USD = 1.2500, which currency is the base currency?

2. Hypothetical: EUR/USD bid 1.2000, ask 1.2003. You buy 1 mini lot and later sell at a bid of 1.2033. What is your gain before fees?

3. When is forex liquidity often highest?

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