Spreads and Pips 

The difference between the bid price and the ask price in a forex quote is normally called the spread. In the previous example: USD/CAD = 1.3495/99, the spread is 0.0004, or 4 pips. Pips, or points, is the common name used to refer to incremental changes in a forex quote – a change from 1.3495 to 1.3496 would equal one pip. Although these currency movements may seem small, due to leverage used in the forex market, small changes can result in large profits or losses. (Learn how brokerages make some of their profits in How is spread calculated when trading in the forex market?)

With the major currency pairs such as the EUR/USDUSD/CADGBP/USD, one pip would be equal to 0.0001. However, if you take a look at a USD/JPY quote you'll notice the pair only goes to two decimal places, so one pip would be 0.01. So, in general, a pip represents the last decimal place in the quote.


Currency Quote Overview

USD/CAD = 1.3495/99

Base Currency 

Currency to the left (USD)


Quote/Counter Currency

Currency to the right (CAD)


Bid Price


Price for which the market maker will buy the base currency. Bid is always smaller than ask.

Ask Price


Price for which the market maker will sell the base currency.


One point move, in USD/CAD it is .0001 and 1 point change would be from 1.3495 to 1.3496

The pip/point is the smallest movement a price can make.


Spread in this case is 4 pips/points, or the difference between bid and ask price (1.3499-1.3495).



Similar to how most stocks trade in lots to facilitate trading, currencies are also traded in lots – $100,000 is typically the standard lot. There are also smaller lots with a size of $10,000 called mini-lots, or $1,000 called micro lots. To many, these may seem like large amounts but because currencies only move in small increments, only a few pips at a time, a larger amount of currency is needed to generate any sizable profits or losses. (For more on mini lots, see Forex Minis Shrink Risk Exposure.)

Direct Currency Quote vs. Indirect Currency Quote 

You can quote a currency pair in two ways, either directly or indirectly. A direct currency quote is simply a foreign exchange quote where the foreign currency is the base currency; an indirect quote is a currency pair in which the domestic currency is the base currency. For example, if you're in Canada and the Canadian dollar is the domestic currency, a direct quotation would take the form of a variable amount of the domestic currency for a fixed amount of the foreign currency. A Canadian bank giving a quote of "C$1.35 per US$1" would be a direct quote. Conversely, an indirect quote fixes the domestic currency and varies the foreign currency. In the same example, if the Canadian bank gave a quote of "C$1=US$0.74" it would be an indirect quote.

Cross Currency 

A currency quote given without the U.S. dollar as part of the currency pair is called a cross currency quote. Common cross currency pairs include the EUR/CHF, EUR/GBP and EUR/JPY. Although having cross currencies increases the amount of choice for the investor in the forex market, cross currencies are not as popular as ones that have the U.S. dollar as a component of the currency pair. (For more on cross currency, see Make The Currency Cross Your Boss)

Now that you know more about reading and interpreting a forex quote, in the next section we'll look briefly at the economics and fundamentals behind forex trades and what economic indicators a new trader should become familiar with and be able to interpret.

Forex Brokers

Related Articles
  1. Trading

    Understanding The Spread in Retail Currency Exchange Rates

    Understanding how exchange rates are calculated and shopping around for the best rates may mitigate the effect of wide spreads in the retail forex market.
  2. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  3. Trading

    Mergers & Acquisitions: Path to Profitable Trades

    When major corporate transactions have a big impact on the currency markets, you can benefit.
  4. Trading

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies.
  5. Trading

    Forex Trading: A Beginner's Guide

    Learn about the forex market and some trading strategies to get started.
  6. Trading

    Make The Currency Cross Your Boss

    Tap into a world of possibilities by going beyond the simple pro- or anti-dollar trade.
Frequently Asked Questions
  1. What are the differences between divergence and convergence?

    Find out what technical analysts mean when they talk about a divergence or convergence, and how they can affect trading strategies.
  2. Can coupon in fixed-income security effect bond yield maturity?

    See how fixed-income security investors can expect to use coupon on semi-annual payments if the bond or debt instrument is ...
  3. How are savings bonds taxed?

    Learn who is responsible for reporting U.S. EE savings bond interest for taxation and when the interest can be reported for ...
  4. What is the difference between inflation and deflation?

    Determine how inflation and deflation affect prices, employment, loans, and the central banks. Economies frequently teeter ...
Trading Center