This article looks at the reading of foreign exchange quotes.
The manner in which foreign exchange currencies are quoted often causes confusion with newcomers to the market. You have to understand the basics of forex trading before you commence trading.
Reading a Foreign Exchange Quote
A currency that is being quoted is done in relation to another currency. The value of a currency is reflected in relation to the value of another. If you wanted to find the value of the exchange rate that exists between the dollar and the yen, you would be faced with USD/JPY=112.78. This quotation is a currency pair. The base currency is the one on the left, the US dollar, and the quote currency is the one on the right, the Japanese yen. The base currency is to the value of one and in this case that means the USD is equal to $1. The quote currency is the value of one base unit in the second currency. This example indicates that for one US dollar you would get 112.78 yen.
The Direct and Indirect Quote
Currency pairs are either quoted direct or indirect pairs. A direct quote refers to a pair where the domestic currency acts as the base currency. An indirect quote offers the domestic currency as the quote currency. An example is if you were looking at the Australian dollar being the domestic currency and the British pound as the foreign currency. The direct quote would be issued as AUD/GBP, while the indirect quote would be shown as GBP/AUD. With a direct quote, the foreign currency value will vary and the domestic currency value will be one unit. The indirect quote will indicate the domestic currency as a variable figure and the foreign currency will be quoted as one unit.
Currency exchange rates are quoted to four decimal places. The one exception to this is the yen which is quoted to two decimal places.
Using Cross Currency Quotes
Cross currency quotes are those where the US dollar does not form part of the quotation. The most common cross currency pairs are Euro to Japanese Yen, Euro to British Pound and Euro to Swiss Franc. Your trading possibilities are expanded by cross currency pairs, but they are not traded as regularly as the major pairs which include the US dollar.
Bid and Ask Prices
All trades carry a bid and an ask price. When you go long, you are purchasing a pair. This will involve an ask price be the value of the quote currency that you will have to pay to obtain a single base currency.
When you go short, it will show you how much quote currency you will get if you make a sale of one base currency unit. An example is GBP/USD=1.6100/08. This indicates that the bid price is 1.61 and the ask price is 1.6108. The price that is indicated on the left of the equation is the bid price. The two digits that appear after the slash represents the ask price. You must note that the bid price should always be less than the ask price.