Forex trading is not all about currency and making profits or losses. There is so much more than that you need to know if you want to make it in forex trading. Understanding forex quotes and Currency Pairs are essential if you’re going to be a smart trader.
What is Forex Quote?
In forex, a quote is the cost of one currency using the other. This refers to how much of one currency is worth another one. And since you are dealing with two currencies by selling and buying the other, they are in terms of currency pairs. For you to know the forex quote, you have to compare a currency pair. That is one currency to the other. For example; in the EUR/USD pair, 1 Euro is $1.1404, and that is the forex quote.
How to read Forex Quotes?
Reading forex quotes is important when you want to trade. You have to understand several basics to make it possible. First, be able to read ISO code. This refers to three-letter abbreviation for currencies from each country. That means for examples; USD, JPY, and EUR. When reading forex quotes, you will find currency pairs. For example; EUR/USD= 1.4200. Since forex quotes the price of a currency in terms of the other. This means that 1 Euro is worth 1.4200 dollars.
What is a Currency Pair?
In forex trading, you will find currency pairs/forex pairs, which is usually two different currencies paired with one valued against the other. Examples of forex currency pairs include GBP/JPY, USD/JPY, EUR/USD, and USD/ZAR. In a currency pair, only the ISO code which is an abbreviation of the currency in three letters is indicated.
How do currency pairs work?
In a currency pair, you will have two types of currencies. There is the base currency and the quoted currency. The two are compared to each other, and one is valued in terms of the other. The first currency is the base, and the last one is the quote currency. Always, a currency pair will be accompanied by a price. The price shows how much of quote currency is required to buy the base currency.
Base currency and the Quoted currency
For each currency pair, you find in forex; there will be a base currency and a variable/quote currency. When you are given EUR/USD, it means that the first currency, which in this case is EUR is the base currency while USD is the variable/quote currency. This applies to all other currency pairs. When you have a currency pair such as EUR/USD = 1.4200, it means that the price is the cost of the base currency in terms of the quoted price. It is also important to note that irrespective of what your base currency is, it will always be equals to 1 unit.
What is bid and ask?
Bid and ask are parts of a forex quote. You will find currency pairs with a double price. For example; EUR/USD = 1.4200/05. In reality, it is EUR/USD = 1.4200/1.4205, but only the last two digits are shown since the difference is very little. In this case, you have two prices, the bid price, which is 1.4200 and the asking price 1.4205. The bid price refers to how much of the quoted currency you will need to buy one unit of base currency while the asking price refers to how much of quoted currency you will make by selling a single unit of the base currency. For brokers, the bid price refers to how much they are willing to buy a base currency while asking price is how much they are willing to sell a base currency.
Understanding spreads and pips
In forex, spreads, and pips relate to each other directly. Spread is the difference between the buying and selling price in a currency pair. This is because, when you are buying a currency, you will spend more than when you are selling. The difference in between is the spread and makes the profit for a broker. For example; EUR/USD = 1.4200/1.4205. In this case, the spread is 0.0005.
However, a pip is the smallest value in any currency quote in forex. In the example above, the pip will be 5 pips. In this case, the spread is 5pips.
Forex lots explained
Forex lots refer to specific amounts of units of currency you trade within forex. In buying and selling, you use currency units, which are lots. There is a standard size of a lot which is 100,000 units of a currency. However, there are other lots which are, mini- 10,000units, micro- 1,000units, and nano-100units.
Direct quote vs. Indirect quote
There are two types of forex trading quotes. Direct quotes will mostly appear in terms of home currency. What this means is that for a person in the US for example; you will find EUR/USD to be in direct since the quote is showing you how much of USD dollars you need to buy a EURO. In such a case, you have a direct quote.
However, there are other cases where you find the quote on a currency pair appearing inversely. This means that you cannot read the conversion of your home currency to foreign currency directly. Indirect currency can be used when in a foreign currency, and you want to know the quotes for your home currency. It is shown as 1/direct quote. And the final price will be in decimals.
Forex Exchange Currency
In doing forex exchange, the market determines the exchange rate. However, forex currency exchange is just exchanging one currency for the other to make a profit. It is basically, buying and selling when the market is favorable to make a profit. A good example is. You can sell 10 units of EUR at 1.4205 of US dollars and buy them once the price has reduced to 1.4200 US dollars and make a profit.
Final Thought
Forex trading revolves around all the factors mentioned above. By understanding forex quotes and Currency Pairs, it becomes easy to walk your way through the world of forex trading and succeed. It is important to note that all the elements mentioned above related to each other. One cannot work without the other. Being able to connect all of them makes it easy to look at the market and see it. They all contribute to how well one can interpret the market and trade.
