Forex Fundamentals·Currency Pairs & The Forex Market
How Forex Prices Move
Bid, Ask, and the Spread
Every forex pair has two prices at any moment. The bid is the price you sell at; the ask is the price you buy at. The ask is always slightly higher than the bid — that gap is called the spread, and it's the primary way brokers make money on your trades. Understanding the spread is essential because it represents a cost you pay on every single trade.
Definition
Bid Price
The price at which the market (or your broker) is willing to buy the base currency from you. This is the price you receive when you sell (go short). The bid is always the lower of the two quoted prices.
Definition
Ask Price (Offer)
The price at which the market (or your broker) is willing to sell the base currency to you. This is the price you pay when you buy (go long). The ask is always the higher of the two quoted prices.
Definition
Spread
The difference between the bid (sell) price and the ask (buy) price. If EUR/USD bid is 1.1048 and the ask is 1.1050, the spread is 2 pips. Lower spread = cheaper to trade. Spreads widen during low liquidity or high-impact news events.
Spread in action
You buy EUR/USD at the ask price of 1.1050. At that exact moment, if you sold, you'd get the bid price of 1.1048. You start the trade down 2 pips (the spread). The price needs to move at least 2 pips in your favor before you break even. This is your 'cost of doing business' on every trade.
| Pair | Typical Spread (Normal) | Spread During NFP | Spread at 3 AM ET |
|---|---|---|---|
| EUR/USD | 0.5 – 1.2 pips | 3 – 8 pips | 1.5 – 3 pips |
| GBP/USD | 0.8 – 1.5 pips | 5 – 12 pips | 2 – 5 pips |
| USD/JPY | 0.6 – 1.2 pips | 3 – 8 pips | 1 – 3 pips |
| EUR/GBP | 1.0 – 2.0 pips | 4 – 10 pips | 2 – 5 pips |
| USD/TRY | 8 – 30 pips | 30 – 100+ pips | 15 – 50 pips |
Watch for spread spikes
Spreads can widen dramatically during high-impact news releases (NFP, CPI, rate decisions) and during low-liquidity periods (late US session, holidays). A 2-pip spread can balloon to 15+ pips in seconds. This alone can trigger stop losses on tight trades. Some traders avoid trading during the first 5 minutes of major news releases specifically because of spread widening.
What is a Pip?
A pip (Percentage in Point, or Price Interest Point) is the smallest standard price move in most forex pairs. For EUR/USD, one pip is 0.0001. So a move from 1.1050 to 1.1051 is one pip. Pips are the universal unit of measurement in forex — traders don't say 'I made $500,' they say 'I made 50 pips.'
Definition
Pip
The fourth decimal place in most currency pairs (0.0001). For JPY pairs, it's the second decimal place (0.01). A move from 150.00 to 150.01 in USD/JPY is one pip. The pip is the standardized unit for measuring price change in forex.
Definition
Pipette (Fractional Pip)
The fifth decimal place in most pairs (0.00001) or third in JPY pairs (0.001). Many modern brokers quote in pipettes for more precise pricing. A price of 1.10503 is 1.1050 and 3 pipettes (or 0.3 pips). Pipettes allow brokers to offer tighter spreads.
Definition
Point
Sometimes used interchangeably with pip, but in some broker platforms, a 'point' refers to the smallest price increment (a pipette). Always check your broker's terminology to avoid confusion when calculating risk.
| Pair Type | Pip Location | Example Move | Pips | Pipettes |
|---|---|---|---|---|
| Standard (EUR/USD) | 4th decimal (0.0001) | 1.1050 → 1.1150 | 100 pips | 1,000 pipettes |
| JPY pairs (USD/JPY) | 2nd decimal (0.01) | 150.00 → 150.50 | 50 pips | 500 pipettes |
| Pipette display | 5th decimal (0.00001) | 1.10500 → 1.10510 | 1 pip | 10 pipettes |
| JPY pipette display | 3rd decimal (0.001) | 150.000 → 150.010 | 1 pip | 10 pipettes |
How Many Pips is That? — Practice
Being able to quickly count pips is a foundational skill. Let's practice with several examples. The trick is simple: for most pairs, count the digits in the fourth decimal place. For JPY pairs, count the second decimal place.
| Pair | Entry Price | Exit Price | Calculation | Pips |
|---|---|---|---|---|
| EUR/USD | 1.1050 | 1.1120 | 1.1120 - 1.1050 = 0.0070 | +70 pips |
| GBP/USD | 1.2680 | 1.2615 | 1.2615 - 1.2680 = -0.0065 | -65 pips |
| USD/JPY | 150.00 | 150.85 | 150.85 - 150.00 = 0.85 | +85 pips |
| USD/JPY | 148.50 | 147.75 | 147.75 - 148.50 = -0.75 | -75 pips |
| EUR/GBP | 0.8650 | 0.8690 | 0.8690 - 0.8650 = 0.0040 | +40 pips |
Pip Value Calculator
How much is one pip worth in dollars? It depends on your lot size (position size). This is critical because pip value determines how much money you make or lose per pip of price movement. Use the slider below to see how pip value changes with position size.
At 10,000 units, one pip on EUR/USD is worth $1.00. A 50-pip move would be $50.00. A 100-pip move would be $100.00.
| Lot Type | Units | Pip Value (EUR/USD) | 50-Pip Win | 50-Pip Loss |
|---|---|---|---|---|
| Standard Lot | 100,000 | $10.00 / pip | +$500 | -$500 |
| Mini Lot | 10,000 | $1.00 / pip | +$50 | -$50 |
| Micro Lot | 1,000 | $0.10 / pip | +$5 | -$5 |
| Nano Lot | 100 | $0.01 / pip | +$0.50 | -$0.50 |
Quick reference for pip values
For EUR/USD: a standard lot (100,000 units) = $10 per pip, a mini lot (10,000 units) = $1 per pip, a micro lot (1,000 units) = $0.10 per pip. For JPY pairs, the formula is slightly different: pip value = lot size x 0.01 / current exchange rate. At USD/JPY = 150.00, a standard lot pip value is approximately $6.67.
JPY pip value note
Because JPY pairs use two decimals instead of four, the pip value calculation differs. For USD/JPY at 150.00: Pip value = (0.01 / 150.00) x 100,000 = $6.67 per pip per standard lot. This means JPY pairs have slightly different risk profiles than USD-quote pairs.
What Causes Prices to Move?
At the most basic level, forex prices move because of supply and demand — when more people want to buy a currency than sell it, the price rises. But what drives that buying and selling? Several interconnected factors.
| Factor | How It Moves Prices | Example |
|---|---|---|
| Interest Rate Changes | Higher rates attract capital, strengthening the currency | Fed hikes rates -> USD strengthens |
| Economic Data Surprises | Better-than-expected data = bullish for the currency | US NFP beats forecast -> USD rises |
| Geopolitical Events | Uncertainty drives safe-haven flows | War outbreak -> JPY and CHF strengthen |
| Market Sentiment | Risk-on/risk-off shifts move correlated groups | Global sell-off -> AUD/NZD weaken |
| Central Bank Intervention | Direct market buying/selling by central banks | BoJ buys USD/JPY to weaken yen |
| Technical Levels | Algorithmic and human traders react to chart patterns | Price breaks key resistance -> buy orders trigger |
Notice how EUR/USD price responds to key support and resistance levels, with larger moves triggered by fundamental catalysts like rate decisions and economic data releases.
Knowledge check
EUR/USD moves from 1.1050 to 1.1085. How many pips is that?
Knowledge check
On a mini lot (10,000 units), what is the pip value for EUR/USD?