Understanding Forex Quotes
By: Riffat Mughal
Forex is a market where one can buy, sell or exchange currencies also
known as currency trading market or FX. At Forex, markets quotes also
known as currency exchange rates are used to understand value of
currencies and investors can trade in those currencies to make profits.
Therefore, first step is to understand Forex quotes before participating in forex markets.
Forex quotes are quoted in pairs like EUR/USD. Each pair is
international three letter code of the currency. For example EUR for
EURO, USD for US Dollar, GBP for Great Britain Pound, JPY for Japanese
Yen, AUD for Australian Dollar and others. Each pair includes base
currency and counter currency.
Let's understand it with the help of an example:
GBP/USD = 1.9714
Here, the currency on the left i.e. GBP is the base currency. The
currency on the right side is known as counter currency i.e. USD. The
base currency is the basis of the trade. GBP/USD indicates how much USD
you can buy with 1 GBP. More examples include:
USD/JPY indicates how much Japanese Yens you can buy with 1 United States Dollar;
Similarly EUR/GBP indicates the exchange rate of Great Britain Pound with 1 Euro.
Always keep two things in mind while reading foreign exchange quotes:
1) The currency listed is the base currency
2) Value of base currency is always equal to 1.
In forex market, US Dollar is usually considered as the base currency
for quotes. Now think of a quote showing what a US Dollar is worth in
that other currency. When US Dollar is considered as base currency and
the quote goes up, means US Dollar has strengthened in value and the
other currency has weakened. Rising quotes means that now a participant
can buy more of the other currency for 1 US Dollar.
There are certain currencies which are not based on US Dollar. They
are: GBP, AUD and EUR. For these currencies, a rising quote means the US
Dollar is weakening and buys less of the other currency than before.
In other words, if a currency quote goes higher, that increases the
value of the base currency. A lower quote means the base currency is
weakening.
Cross currencies do not involve US Dollar as currency pairs, but the
basis is the same. For example, a quote of EUR/JPY of 127.95 signifies
that one Euro is equal to 127.95 Japanese yen.
In Forex market, "Bid" is the price at which one can sell base
currency at the same time buying the counter currency. However, "Ask" is
the price at which you can buy base currency at the same time selling
the counter currency.
For example:
EUR/USD= 1.2385/1.2390
Here, 1.2385 is known as the bidding price (EUR in our case here),
while 1.2390 is the asking price, while asking price is the price that
one buy the base currency (USD in our case here). The difference of the
bid and ask price is called 'spread'. The spread let currency brokers to
make profits without charging commissions to their clients (Sell high
and buy low).
Here are some examples given for beginners to understand Forex quotes more easily.
EUR/JPY= 127.95/128.00
Base currency= EUR i.e. Euro.
Bid price= 127.95; Ask price= 128.00
When selling Euros, 1 Euro = JPY 127.95; when buying Euros, JPY 128.00 = 1 Euro.
Spread = | 127.95 - 128.00 | = 0.05
GBP/USD 1.7400/1.7410
Base currency= GBP
Bid price= 1.7400; Ask price= 1.7410
When selling Pound, 1 Pound = USD 1.7400; when buying Pound, USD 1.7410 = 1 Pound.
Spread = | 1.7400 - 1.7410 | = 0.001
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