This paragraph discusses the main features of a forex quote that traders should be aware of – as well as some helpful advice on how to analyze a currency pair:
- The basics of a forex quote
- The bid and ask price
- What the spread means
- The difference between direct and indirect quotes
- How to read and comprehend a forex quote
Forex quotes indicate the current worth of different currencies at any moment in time. Since the price changes (the quote) affect the trader's earnings or losses, it is crucial to acquire a solid knowledge of how to read currency pairs.
WHAT ARE FOREX QUOTES?
A forex quote is the value of one currency relative to another currency. These quotes always involve currency pairs because you are selling one currency to buy another. For example, the price of one Euro may be $1.1404 when looking at the EUR/USD currency pair. Brokers will usually quote two prices for any currency pair and earn the difference (spread) between the two prices, under normal market conditions.
The following sections will explain the different aspects of a forex quote. The same quote will be used throughout this article to maintain consistency. This example is shown below:
EXAMPLE OF EUR/USD QUOTE
To read currency pairs correctly, traders should know the following basics of a forex quote:
ISO code: The International Organization for Standardization (ISO) create and publish international standards and have applied this to global currencies. This means each country’s currency is abbreviated to three letters. For example, the Euro is shortened to EUR and the US dollar to USD.
Base currency and quote currency: Forex quotes show two currencies, the base currency, which appears first and the quote or variable currency, which appears last. The price of the first currency is always expressed in units of the second currency. Using the previous EUR/USD example, it is easy to see that one Euro will cost one dollar, 14 cents and 04 pips. This is unusual as you cannot physically hold fractions of one cent but this is a common feature of the foreign exchange market.
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BID AND THE ASK PRICE
When trading forex, a currency pair will always show two different prices as seen below:
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The bid (SELL) price is the price that traders can sell currency at, and the ask (BUY) price is the price that traders can buy currency at. This may seem confusing as it is only natural to think of “bid” in terms of buying so just remember the bid/ask terminology is from the broker’s perspective.
Traders will always want to buy forex when the price is low and sell when the price goes up; or sell forex expecting that the currency will lose value and buy it back at a cheaper price in the future.
WHAT ARE SPREAD MEANS?
The price to sell a currency will usually be less than the price to buy the currency. This difference is called the spread and is where the broker makes money for executing the trade. Spreads tend to be smaller (less) for major currency pairs due to their high trading volume and liquidity. The EUR/USD is the most widely traded currency pair, so it is not surprising that the spread in this example is 0.6 pips.
- Bid and Ask prices are from the viewpoint of the broker. Traders buy currency at the ask price and sell at the bid price.
- The base currency is the first currency in the pair and the quote currency is the second currency.
- The smallest movement for non-JPY currency pairs is one pip (a single digit change in the fourth decimal place of the quoted price and a single digit change in the second decimal place for JPY pairs).
- The spread is the initial obstacle (cost) that traders face in a trade.