When trading forex, the price we see is a quote. It's the price of one currency in terms of another or how much 1 unit of one currency will cost you in another currency. We've learnt about forex quotes from our previous blogs. But we haven't gone into further details on how to interpret or read these forex quotes. So: here's how to read forex quotes.
Are you a relatively new trader? We've got you covered - check out our Make it Happen series aimed at traders with full-time jobs, limited capital and limited time.
How to Read Forex Quotes 101
What are currency pairs?
Currency pairs are made up two things: a base value and a counter value. The base currency value appear first or at the top of the quote. The counter currency comes second and is always in parentheses after or below the base currency.
The bid price is the best price available for you to buy a pair (the price on the left). Conversely, the ask price is the best available price for you to sell a pair (price on the right). The difference between these prices is the basis for margin profits and losses.
Photo credits: CMC Markets
"1.1037", in this case, is the quote's bid price, while "1.1039" is the ask price.
The forex market quotes currency prices in four to six significant digits after the decimal place. For example, EUR/GBP could be quoted at 1.1037. The standard convention consists of 4 digits after the decimal place. This applies to major world currencies, including the US dollar (USD) and the euro (EUR). The exception is the Japanese yen (JPY), whose quotations are given to two decimal places.
What are lots, spreads, and pips?
Photo credits: Dailyfx
You'll notice that there are basically three components to any forex quotes: the currency pair (the first two currencies), a spread, and a lot.
What is a spread?
A spread is the difference between the bid and ask prices. This difference can be either positive (bid is higher than ask) or negative (ask is higher than bid). The typical bid-ask spread can vary between 0 to 100 pips, depending on market conditions. High volume currency pairs generally have tight spreads and narrower ranges (less movement in the currency pair price). The EUR/USD pair is the most liquid currency pair, so you would expect its value to be relatively stable. Other less liquid currencies exhibit greater volatility.
- Example: EUR/GBP 1.1037/1.1039
- Spread =1.1039-1.1037 =2 pips
A pip is one point or the minimum price change that a given currency pair can make against another currency.
- For example, if EUR/GBP moves from 1.1037 to 1.1039, 1.1039-1.1037=2 pips.
A forex lot is the standard unit in foreign exchange trading. In the spot forex market, one standard lot usually consists of 100,000 units of a base currency, with smaller lots being worth proportionately less. When calculating lot size, you don’t take the pip value into consideration. It is a common practice in any type of trading to discuss the quantities to purchase or sell using "lots" instead of the actual number.
- Example: EUR /GBP at an exchange rate of 1.1037 :(.0001/1.1037x100,000)=11.04 EUR
Photo credits: Quora
What are trading positions?
You can trade in the foreign exchange markets by taking the long or short position, depending on your trading style. For a long position, you should buy, and for short, you should sell.
The price movement of the currency pair is strongly related to what is happening in the forex market. A trader in FX can earn profits whenever there is a change in the relative value of a currency, and it may move higher or lower depending on where it starts.
A long position/buy on the EUR/GBP means that we predict the Euro will increase in value as compared to the GBP. If this turns out to be true, then we have a profit. The reverse is true for a short position/sell on the EUR/GBP currency pair.
Here's how to understand trading jargon>>
What are direct or indirect currency quotes?
Forex brokers can quote currency pairs directly or indirectly. In a directly quoted currency pair, the foreign currency is the base currency, whereas the domestic currency is the counter (or quote) currency. Conversely, in an indirectly quoted currency pair, the domestic (or home) currency is the base currency, whereas the foreign (or away) currency is the counter currency.
Debunking the myths: how much do traders REALLY make? See What is the Average Trader Salary?>>
What are cross currencies?
When the US dollar is not involved in a currency pair, this is referred to as cross-currency. EUR/GBP, EUR/CHF, and EUR/JPY are the most common cross-currencies. These pairs do not have as much of a following.
Cross currencies offer various benefits, including more trading possibilities and the option to get into markets that are not listed on a standard forex chart. The disadvantages of cross currency pairs include lower liquidity and lower interest among traders.
Here are the 5 best currencies to trade - and here's why>>