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Forex Basic | learn how to read a Forex quote

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Forex basic | learn how to read a Forex quote

As a general rule, each currency has a three letters symbol, which is used in Forex quotes.

The first two letters identify the name of the country while the third letter identifies the name of that country’s currency.

For example:

• AUD (Australian dollars)

• JPY (Japanese yen)

• CHF (swiss francs)

•CAD (canadian dollars).

When trading currencies, the trade is always done in pairs and so when you buy one currency, another currency is simultaneously being sold.

Forex trading

The most commonly traded currency pairs are

• Euro and US Dollar (EUR/USD)

• US Dollar and the Japanese Yen (USD/JPY)

• US Dollar and Swiss franc (USD/CHF)

• British Pound and US Dollar (GBP/USD)

The most commonly traded currency pairs are made from the most common and actively
traded currencies which are called the “Majors”.

The list of currencies below consists of the Majors

• USD (US dollars)

• EUR (European Euros)

• GBP (United Kingdom pounds)

• JPY (Japanese yen)

• AUD (Australian dollars)

• CHF (Swiss francs)

• CAD (Canadian dollars)

When quoting currency pairs, the first currency is referred to as the Base currency while the second referred to as the Counter or Quote currency.

The currency pair is used to represent how much Quote currency is required to exchange

Example:

• EUR/USD 1.3500 mean that one Euro is traded for 1.35 USD.

As such the Base currency is always equal to 1 monetary unit of exchange.

The dominant base currencies are, in order of frequency, the EuR, GBP, and USD.

When a currency is quoted against the US Dollar it is called a direct rate.

Any currency pair that does not trade against the US Dollar is referred to as a cross rate.

So what takes place once a trade is taking place?

Example:

• You buy British Pounds with the US Dollars – (GBP/USD), anticipating, the Pound to increase in value relative to the Dollar.

If the Pound rises relative to the Dollar, you sell the position (you Sell British Pound) and have made a profit.

Keep in mind that there are no standard cross-currency Quotes.

Some have the base currency on the top while others have it on the bottom.

So how can you tell which is which?

You need to know at least one pair of currencies and which one of the pair is the more valuable.

Dominant Base Currencies

• Euro – EUR/USD, EUR/GBP, EUR/CHF, EUR/JPY, EUR/CAD

• British Pound – GBP/USD, GBP/CHF, GBP/JPY, GBP/CAD

• US Dollar – USD/CAD, USD/JPY, USD/CHF

The Pip

The pip is the smallest unit of change in which a currency pair can move.

In the Forex world, currencies are traded in fractions of a Cent, or Euro, and so on.

Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, with four decimal points to follow.

For example

EUR/ usd is equals to 1.3377.

In this example, a single pip equals the smallest change in the fourth decimal place – that is, 0.0001.

Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.

The only notable exception to this rule is the USD/JPY pair where a pip equals $0.01.

A numeric example

You buy the EUR/USD, which is quoted with five digits in all out of which 4 decimals, at 1.3530 and sell it later at 1.3542.

The difference would be +12 pips, or. 0012.

However, in the case of the uSD/JPY currency pair, one has to make a note that it is quoted with only 2 decimals.

And so if you bought the uSD/JPY at 110.51 and it then went down to 110.31 where you have sold it, the difference would be -20 pips, or. 20 pips loss.

The pip difference would determine your calculation of profit/loss on the trade.

As mentioned earlier, the quote currency is translated into a certain number of units of the base currency.

For example

A quote of EuR/uSD at 1.35 means that, for every 1 euro, you get 1.35 uS dollars.

When the price of the quoted currency goes up, it indicates that the base currency

is becoming stronger and so one unit of the base currency will buy more of the quote currency.

On the other hand, if the price of the quote currency falls, the base currency is becoming weaker.

The Bid and the Ask

Forex quotes are shown in ‘bid’ and ‘ask’ prices.

The Bid is the price at which the market
maker is ready to buy a given currency

pair and so at this price the trader (seller) can sell the base currency to the market maker,

The Bid is shown on the left side of the quotation.

On the other hand, the ask is the price at which the market maker is ready to sell

given currency pair and so at this price the trader (buyer) can buy the base currency from the market maker,

The ask is shown on the right side of the quotation.

The ask price is also called the offer price.

Symbol Bid Ask

EUR/USD 1.3517 1.3520

Over the above Quote sample we can buy from the market maker one euro for 1.3520

american dollars, or sell one euro for 1.3517 american dollars to the market maker.

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