Currencies are quoted in pairs, for example the EUR/USD is the euro/U.S. Dollar pair. Using this quotation, the value of a currency is determined by its comparison to another currency.

The first currency of a currency pair is called the base currency, and the second currency is called the quote currency. The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency.

For example, if the EUR/USD currency pair, which is the most popular pair in the forex market, is quoted as being EUR/USD = 1.0657 and you purchase the pair; this means that for every euro you sell, you purchase (receive) approximately USD$1.07. If you sell the currency pair, you will receive 0.9384 euros for every US$1 you sell. The inverse of the currency quote is USD/EUR, and the corresponding price would be USD/EUR = 0.9384, meaning that approximately €0.94 would buy 1 U.S. dollar. (To learn more, read Why is currency always quoted in pairs?)

What is a pip?

When it comes to reading currencies, it is important to understand how they are displayed as well as the terminology used. You’ve already learned about quote and base currencies. The next step is to understand that currencies are commonly displayed to four decimal points. A pip is a very small measure of change in a currency pair. Specifically, a pip is a standardized unit and represents the smallest amount by which a currency quote can change. As mentioned, since most quotes are displayed to four decimal places, a change of one pip represents a change of the fourth decimal point, which is equal to 1/100th of 1% percent or one basis point. This level of detail is important because it helps minimize the volatility across the forex market and in many cases leveraged positions are deemed successful or unsuccessful depending on the changes to the last decimal point. (For more information, see the What is a Pip? video)

Most Popular Currency Pairs

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