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Currencies are always quoted in pairs, such as GBPUSD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:
The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example here, you have to pay 1.5143 U.S. dollars to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.5143 U.S. dollars when you sell 1 British pound.
The base currency is the "basis" for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. In caveman talk, "buy EUR, sell USD."
You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.
A pip (Percentage In Point) in Forex is the minimum price movement of a currency pair.
For example, in the USDJPY it is 0.01 and in the GBPUSD it is 0.0001. A pip is then worth $10, $1 or $0.1, depending on the size of lots you trade:
Lot size Name Pip value
$100,000 Standard $10
$10,000 Mini $1
$1,000 Micro $0.1
Forex has three basic classes, the first is called a Direct Rate, this is where the USD is the Quote Currency, ie the second value in the Cross Rate. This holds true for such currencies as the EUR,GBP, NZD and the AUD.
The second is called a Non Direct Rate, this is where Currencies are traded indirectly against the U.S. Dollar An example is the USD/CAD (Canadian Dollar). Here the USD is the first value in the Cross Rate.
Lastly we have Non USD Based Rates, these are Currency pairs that do not involve the USD. Even though the USD is not represented in the quote, the USD rate is usually used in the quote calculation. An example of a cross rate is the EUR/CHF.
In the above example of EUR/CHF, the Base Currency is EUR, so to find out what the correct Pip Value would be, in USD, you would have to use the current EUR/USD exchange rate to bring the Quote back into USD. If the EUR/CHF = 1.2227 (for example) and the EUR/USD = 1.3708, then the Pip value in USD would be 1.3708 / 1.2227 or 1.12.
In this way you can calculate the correct USD based Pip Value for non USD based Cross Rates.
Fractional pips are a new pricing feature which allows you to see more price action detail A fractional pip is a tenth of a pip and the addition of this feature allows you to take advantage of smaller price increments and moves in the market.
For example, instead of quoting prices with four digits, i.e. EURUSD at 1.4251 / 1.4253, the quote is now with five digits i.e. 1.42508 / 1.42528 with the last digit (sometimes quoted as a subscript) referring to the fractional pip. If (for example) you are trading Standard Lots sizes and as such the pip value for a EURUSD 100,000 position is $10 then the value of a fractional pip for this same position is $1.