Lessons › Markets of the world › Forex: pairs, pips and sessions

World 6 · Markets of the world · lesson 7 · level 2

Forex: pairs, pips and sessions

A currency pair shows how much of the second currency buys one unit of the first, and a pip is a tiny standard step used to measure its moves.

In one line

A currency pair shows how much of the second currency buys one unit of the first, and a pip is a tiny standard step used to measure its moves.

Explained simply

Imagine swapping stickers with a friend, where one of your big stickers is worth 1.10 of theirs. A currency pair works like that, showing how much of one currency buys one unit of another. Traders measure the moves in tiny standard steps called pips.

The lesson

Currencies trade in pairs: in EUR/USD at 1.1000, one euro costs 1.10 US dollars, with the euro as the base currency and the dollar as the quote currency. For most pairs a pip is 0.0001, while for pairs quoted in Japanese yen it is 0.01. Forex trades 24 hours on weekdays through the Asian, European and US sessions, and it is busiest when the London and New York sessions overlap. The bid is the price you can sell at, the ask is the price you can buy at, and the gap between them is the spread.

A worked example

Illustrative example: EUR/USD rises from 1.1000 to 1.1025. The move is 0.0025 (1.1025 minus 1.1000), which is 25 pips (0.0025 divided by 0.0001). On USD/JPY a pip is 0.01, so a move from 150.00 to 150.40 is 40 pips (0.40 divided by 0.01).

The same idea at four levels

1. Beginner. A currency pair shows how much of the second currency buys one unit of the first.
2. Foundation. In EUR/USD at 1.1000 the euro is the base currency, the dollar is the quote currency, and one euro costs 1.10 dollars.
3. Intermediate. A pip is 0.0001 for most pairs and 0.01 for yen pairs, so a move from 1.1000 to 1.1025 is 25 pips.
4. Advanced. Forex runs 24 hours on weekdays through the Asian, European and US sessions, and it is busiest when London and New York overlap.
5. Expert. Experts state stops and targets in pips, check the spread in pips before trading, and expect smaller moves in the quietest hours.

Mistakes to avoid

• Counting yen pairs with four decimal places instead of two.
• Trading in the quietest hours and expecting big moves.
• Mixing up the base currency and the quote currency when reading a pair.

Goal of this lesson: Read a currency pair quote and measure moves in pips.