How currency pairs work
Learning objectives
Identify the base and quote currency in any pair and say what the price represents
Measure a move in pips, including on yen pairs where the convention differs
Calculate the value of a pip for a given lot size and explain why it isn't fixed
Base and quote explained
Currencies have no price on their own. A euro is worth something only in terms of something else, which is why forex quotes always come in twos.
Take EUR/USD = 1.0850.
- EUR is the base currency. It's always one unit.
- USD is the quote currency. It's what you're measuring in.
So the price means: one euro costs 1.0850 US dollars.
That's the whole convention. Read every pair the same way. GBP/JPY at 190.50 means one pound costs 190.50 yen. USD/CHF at 0.8800 means one dollar costs 0.88 Swiss francs.
Buying the pair means buying the base and selling the quote. Buy EUR/USD and you are long euros, short dollars, in a single position. There's no way to hold one side alone, as How traders make money: bid, ask, spread, long and short established.
Which currency goes first isn't arbitrary. Convention runs roughly EUR, then GBP, then AUD, NZD, USD, CAD, CHF, JPY, and the higher-ranked currency takes the base position. That's why you see EUR/USD rather than USD/EUR, and USD/JPY rather than JPY/USD.
What are pips?
A pip is the standard unit of price movement, and it's how everything in forex gets measured: spreads, stop distances, targets, results.
On most pairs, a pip is the fourth decimal place. EUR/USD moving from 1.0850 to 1.0851 is one pip.
On yen pairs, a pip is the second decimal place. USD/JPY moving from 150.25 to 150.26 is one pip. This exception exists because the yen is worth a small fraction of a dollar, so the fourth decimal would be absurdly fine.
Get this wrong and your risk calculation is out by a factor of a hundred, which is why it's worth committing to memory now rather than discovering it later.
Most platforms also show a fifth decimal on standard pairs, and a third on yen pairs. That extra digit is a pipette, a tenth of a pip. So a quote of 1.08505 is 1.0850 and a half pip. Useful precision, and a common source of confusion when reading spreads.
What about lots?
Position size in forex is measured in lots, and there are three standard sizes:
Name
Units of base currency
Standard lot
100,000
Mini lot
10,000
Micro lot
1,000
Platforms usually express these as volume: 1.00 is a standard lot, 0.10 a mini, 0.01 a micro. Some brokers offer smaller still.
The reason this matters is that lot size is what converts a price move into money.
Pip value explained
Pip value is what one pip is worth to your account, and it depends on your position size.
For a pair quoted in US dollars, held in a US dollar account, the arithmetic is clean:
Lot size
Units
Value of one pip
1.00 (standard)
100,000
$10.00
0.10 (mini)
10,000
$1.00
0.01 (micro)
1,000
$0.10
So a 40-pip move on 0.10 lots is $40. A 40-pip move on 1.00 lot is $400. Same market, same move, ten times the consequence.
Two things change this figure, and both catch people out:
The quote currency. Pip value is fixed in the quote currency, not in yours. On EUR/GBP the pip is worth pounds. If your account is in dollars, that pound amount gets converted at the current rate, so your pip value moves slightly as the market moves.
Yen pairs. Because the pip is the second decimal, the calculation lands differently, and the resulting value in your account currency depends on the USD/JPY rate at the time.
Most platforms display pip value for you, and every broker offers a calculator. Use one rather than assuming. What matters is understanding why it varies, so that a number that looks wrong prompts a check rather than a shrug.
Putting it all together
Let's bring everything together with a quick example.
Example: Anna trades EUR/USD with a $1,000 account, risking 1% per trade, so $10 at risk. This is the calculation from Risk per trade: the 1% rule and position sizing.
Her setup gives an entry at 1.0850 with invalidation at 1.0825, so her stop is 25 pips away.
At 0.01 lots each pip is worth $0.10, so 25 pips costs $2.50.
$10 ÷ $2.50 = 4
Her position is 0.04 lots. Check it: 0.04 lots is $0.40 per pip, and 25 pips is $10, which is 1% of her account.
Notice that every input in that calculation came from this lesson or the last one. Base and quote told her what she was trading. Pips measured the distance. Pip value converted it to money. Nothing else was required.
Key takeaways
The base currency is always one unit and the quote currency is what you measure in. Buying a pair means long the base and short the quote
A pip is the fourth decimal on most pairs and the second on yen pairs. Getting that wrong misstates your risk by a factor of a hundred
Lots convert price moves into money: 100,000 units for a standard lot, 10,000 for a mini, 1,000 for a micro
Pip value is fixed in the quote currency, so it varies for your account when the quote currency isn't the one you hold