Home / Learn Forex Trading / What are Quotes, Pips and Spreads?

What are Quotes, Pips and Spreads?

By Jeffrey Cammack Published: May 25th, 2018 Updated: June 17th, 2019

Quotes, pips and spreads are common terms that are used to describe different aspects of currency pairs. Currency pairs are written as a combination of two 3 letter codes to describe the two currencies in the pair. AUD/USD is the Australian Dollar and United States Dollar currency pair.

What are Quotes?

When opening a trade on the Forex market, the trader is buying one currency and selling another simultaneously. Because we can not buy one currency without selling the other, all currency values are quoted in pairs

The first two letters represent the country, and the third represents the currency.  The first currency listed on the left is the Base currency, while the currency listed on the right is the Quote currency.

A Forex quote will always involve two currencies; where the currency on the left represents the base currency while the currency on the right represents the counter currency which is also referred to as the quote currency.

Base Currency AUD and Quote Currency USD

Example: If the AUD/USD is 0.7500, it means it takes 0.7500 US dollars to buy one Australian Dollar. The value of the Base currency is always 1.

If the value of AUD/USD increases, it means the Base currency has strengthened, and the Quote currency has weakened. If the value of AUD/USD decreases, it says the Base currency has weakened while the Quote currency has strengthened.

What is Pip?

A Pip stands for “Percentage in Point” and represents a unit of price change in any given currency pair. When the value of a currency pair changes by a certain number of pips, then it means the value of the currency pair has changed by that number of units.

In other words, a pip represents the smallest price change a currency pair can make.

If there is an increase by a certain number of pips, there’s an increase in the value of that currency pair. Conversely, if there is a decrease by a certain number of pips, then there is also a decrease in the value of that currency pair.

Most currency pairs are valued till the 4th decimal place. In this case, one pip is one unit of this 4th decimal place, which is 1/100th of a per cent. Occasionally, some brokers will quote you prices in five decimal places, where the 5th decimal is called a pipet or fractional pip.

It’s easier to talk regarding pips, which are whole numbers as opposed to decimal places or fractions.

Example: If the AUD/USD exchange rate is currently valued at 0.7515, and if tomorrow the exchange rate is at 0.7450, therefore there was a fall of 0.0065 (0.7515 – 0.740). If a change of 0.0001 is 1 pip, then a change of 0.0065 represents 65 pips. Therefore, we can say the AUD/USD exchange rate fell by 65 pips.  Much easier.

Not all currency pairs are priced at the 4th decimal place, an example of this being the Japanese Yen, which is priced at the second decimal place. So, when we describe the currency pairs regarding pips, we’re just talking about a unit of conversion.

What are Spreads?

Upon logging into your trading account, the quote window will show both bid and ask quotes for currency pairs. The right is the buy price, and the left side is the sell price. This two-way quote system is used for pricing all currency pairs.

The spread is the difference between the price at which you’re allowed to buy (Ask) and the price at which you’re allowed to sell (Bid). The number of pips between the ask price and bid price is the spread, where the size of the bid-ask spread is a measurement of the size of the transaction cost.

Example: If the current bid price of the AUD/USD is 0.7610 and the current offer price is 0.7611, this means the difference between those prices 1 pip is the spread.

AUDUSD Spread Pricing

The spread is one of two ways your Forex broker makes money. By charging a spread, or a commission, the brokers make a profit. 

Forex Direct Quote vs. Indirect Quote

We can distinguish two types of currency quotes: the direct quote and the indirect quote system. If the second currency or the quoted currency of a currency pair is the domestic currency, then we’re dealing with a direct quotation system.

If the first currency or the base currency of a currency pair is the domestic currency, then we’re dealing with an indirect quotation system.

For example, if we’re looking at the Australian Dollar as being the domestic currency and the US Dollar as the foreign currency then:

  • A direct quote would be USD/AUD
  • While an indirect quote would be AUD/USD.

For example, if the Australian Dollar is the domestic currency, an indirect quote would be 0.7800 AUD/USD which means that with 1 AUD, you can purchase 0.78 USD. The direct quote (USD/AUD) will be the inverse (1/0.7800) or 1.2820 USD/AUD which means that with 1 USD you can purchase 1.2820 AUD.

Forex Cross Currency

A Forex cross currency is a currency pair traded in Forex that doesn’t include the US Dollar in the quotation system. The most popular currency crosses include the following pairs: EUR/GBP, EUR/JPY, and GBP/JPY.

The cross currency pairs were released to help individuals who wanted to exchange their money directly without having first to convert it to USD. When trading these crosses take note that they are less liquid and more volatile, which means that you can also make more money trading these pairs.

Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.