Pairs and Pips in Forex

by Scott Owens

 

Pairs and Pips:  each currency exists in the marketplace not on its own, but as a “cross” between itself and another currency. This is practical, since when you travel to Europe you want to exchange your money for Euros. If you have US Dollars, you will be exchanging money at the rate set by EURUSD. EURUSD is a “pair”.

 

It also happens to be the most popular pair. Most currencies are paired with EUR and USD, and to other currencies to a lesser extent. The “four majors” are EURUSD (Euro/Dollar), USDJPY (Dollar/Yen), GBPUSD (Pound/Dollar), and USDCHF (Dollar/Franc).

 

The bid-ask spread is usually lowest for the four majors, since their volume is the highest. With high volume the dealer is usually assured of having ample liquidity to meet your trading needs, so they charge you less through the spread. For more obscure, less traded pairs, the spread will be more, since dealers assume more risk in completing those transactions.

 

The spread itself is made up of pips. A pip is simply an incremental unit in forex. In stocks, you call them ticks or points. That makes sense because usually all stocks are quoted in the same currency. In forex, each currency may have a different incremental unit. For example, a quote in EURUSD might be 1.3240, versus a quote in USDJPY at 107.87.

 

What is the incremental unit? There is no common unit, so one was created, and it was named a pip. A pip is always worth $10 if the pair ends in USD. If not, you will need to refer to a pip calculator to get the value, since these per pip values can vary, even within the same currency.

Title: Pairs and Pips in Forex
Description: Pairs and Pips: each currency exists in the marketplace not on its own, but as a “cross” between itself and another currency. This is practical, since when you travel to Europe you want to exchange your money for Euros.
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Added: 22 December 2009
Added by: hatem1971

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