How to Read Currency Pair Quotes

15 min read
Beginner

Currency pairs are the foundation of forex trading. Every trade involves buying one currency while simultaneously selling another. Understanding how to read and interpret currency pair quotes is essential for anyone entering the forex market.

Quick Definition: A currency pair shows the relative value of one currency against another. The first currency is the "base" and the second is the "quote" currency.

Anatomy of a Currency Pair

EUR
Base Currency
/
USD
Quote Currency

When you see EUR/USD = 1.0850, this means:

  • 1 Euro (base currency) equals 1.0850 US Dollars (quote currency)
  • To buy 1 Euro, you need 1.0850 US Dollars
  • If you sell 1 Euro, you receive 1.0850 US Dollars

Types of Currency Pairs

1. Major Pairs

Major pairs always include the US Dollar and are the most liquid and widely traded pairs in the forex market. They typically have the tightest spreads and highest trading volumes.

Pair Currencies Nickname Typical Spread
EUR/USD Euro / US Dollar Fiber 0.1-0.5 pips
GBP/USD British Pound / US Dollar Cable 0.5-1.0 pips
USD/JPY US Dollar / Japanese Yen Ninja 0.2-0.7 pips
USD/CHF US Dollar / Swiss Franc Swissy 0.5-1.0 pips
AUD/USD Australian Dollar / US Dollar Aussie 0.5-0.8 pips
USD/CAD US Dollar / Canadian Dollar Loonie 0.5-1.0 pips
NZD/USD New Zealand Dollar / US Dollar Kiwi 1.0-1.5 pips

2. Minor Pairs (Cross Currencies)

Minor pairs don't include the US Dollar but consist of other major currencies. They typically have wider spreads than major pairs but still offer good liquidity.

Pair Currencies Typical Daily Range
EUR/GBP Euro / British Pound 50-80 pips
EUR/JPY Euro / Japanese Yen 80-120 pips
GBP/JPY British Pound / Japanese Yen 100-150 pips
AUD/JPY Australian Dollar / Japanese Yen 70-100 pips
EUR/CHF Euro / Swiss Franc 40-70 pips

3. Exotic Pairs

Exotic pairs include one major currency and one currency from an emerging or smaller economy. These pairs have wider spreads, lower liquidity, and higher volatility.

⚠️ Caution: Exotic pairs can have spreads of 10-100+ pips and may experience significant slippage during news events. They're generally not recommended for beginners.

Examples of exotic pairs include:

  • USD/TRY (US Dollar / Turkish Lira)
  • EUR/ZAR (Euro / South African Rand)
  • GBP/MXN (British Pound / Mexican Peso)
  • USD/THB (US Dollar / Thai Baht)
  • EUR/PLN (Euro / Polish Zloty)

Reading Price Quotes

Understanding Bid and Ask Prices

Every currency pair has two prices:

Price Type Definition Example (EUR/USD)
Bid Price The price at which you can SELL the base currency 1.0848
Ask Price The price at which you can BUY the base currency 1.0850
Spread The difference between bid and ask 2 pips

Direct vs Indirect Quotes

The way currency pairs are quoted depends on your location and the base currency:

  • Direct Quote: Shows how much domestic currency is needed to buy one unit of foreign currency (e.g., USD/JPY for Japanese traders)
  • Indirect Quote: Shows how much foreign currency is needed to buy one unit of domestic currency (e.g., EUR/USD for US traders)

Currency Pair Conventions

💡 Standard Convention: Currency pairs follow a hierarchy. Generally, EUR > GBP > AUD > NZD > USD > CAD > CHF > JPY. The stronger currency by convention is listed first.

ISO Currency Codes

All currencies use three-letter ISO 4217 codes:

  • First two letters represent the country
  • Third letter usually represents the currency name

Examples:

  • USD = United States Dollar
  • EUR = Euro
  • GBP = Great Britain Pound
  • JPY = Japanese Yen
  • CHF = Swiss Confederation Franc

Practical Examples

Example 1: Buying EUR/USD

If EUR/USD = 1.0850:

  • You believe the Euro will strengthen against the Dollar
  • You BUY EUR/USD at 1.0850
  • You're buying Euros and selling Dollars
  • If the rate rises to 1.0900, you profit 50 pips

Example 2: Selling GBP/JPY

If GBP/JPY = 185.50:

  • You believe the Pound will weaken against the Yen
  • You SELL GBP/JPY at 185.50
  • You're selling Pounds and buying Yen
  • If the rate falls to 184.50, you profit 100 pips
✅ Pro Tip: Always think in terms of the base currency. When you "buy" a pair, you're buying the base currency. When you "sell" a pair, you're selling the base currency.

Common Mistakes to Avoid

  1. Confusing base and quote currencies: Remember, the base currency is always first
  2. Ignoring the spread: Always factor in the spread when calculating potential profits
  3. Not understanding pip values: Different pairs have different pip values
  4. Trading exotic pairs without experience: Start with major pairs
  5. Overlooking correlation: Some pairs move together (positive correlation) or opposite (negative correlation)

Currency Correlations

Understanding how currency pairs relate to each other is crucial:

Correlation Type Example Pairs Relationship
Positive EUR/USD & GBP/USD Often move in the same direction
Negative EUR/USD & USD/CHF Often move in opposite directions
Commodity AUD/USD & Gold AUD often follows gold prices

Quick Knowledge Check

Question: If EUR/USD is quoted at 1.0850/1.0852, what is the spread?

0.2 pips
2 pips
20 pips
0.02 pips

Summary

Understanding currency pairs is fundamental to forex trading success. Remember these key points:

  • Every pair consists of a base currency (first) and quote currency (second)
  • Major pairs offer the best liquidity and tightest spreads
  • The bid price is for selling, the ask price is for buying
  • Always consider the spread in your trading calculations
  • Start with major pairs before exploring minors or exotics
Risk Disclaimer: Forex trading involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. Always trade with capital you can afford to lose.