Understanding Forex Trading Quotes

Forex quotes are an intrinsic part of trading foreign currency and they are relatively simple to read once you understand the basic principle. If you are going to be Forex trading then you absolutely need to know what Forex quotes are and how to read them. They can be a little confusing to the beginner but the basic concept is really not that difficult to grasp. Below, we explain how to read a forex quote and define some of the terminology used in relation to Forex quotes.

Currency Pairs and Forex Quotes

Foreign currencies are always traded in pairs and so a Forex quote is basically quoting one currency in relation to another currency. Effectively, the value of one currency is reflected by the value of another currency. A Forex quote consists of three components - the base currency, the quote currency and the price. If you were looking for the exchange rate between the United States dollar and the Great British pound, then you could expect to see a Forex quote presented in the following format:

USD/GBP = 0.6356

Base Currency, Quote Currency and Price

In a Forex quote, the base currency is the currency that appears first. In the example above, the US dollar is the base currency. The quote currency is the currency appears second, so is the British pound in the above example. The price depicts the amount of quote currency you could buy with one unit of the base. The example above shows, then, that one US dollar could buy you .6356 of a British pound. The price is always quoted to four decimal places, with the exception of the Japanese yen which is quoted to two decimal places.

If you were looking at the exchange rate of the US dollar to the Indian rupee then you might see the following quote:

USD/INR = 49.2250

In this example, the US dollar is still the base currency, while the quote currency is the Indian rupee. The price shows that one US dollar could buy you just over 49 rupees. When the price goes up, it means that the base currency has strengthened in value against the quote currency – ie. you could buy more of the quote currency with one unit of the base currency.

Cross Currency

In the Forex markets, most quotes will contain the US dollar as either the base currency or the quoted currency – for example USD/GBP or INR/USD. Pairs that have the US dollar included are known as the majors. Quotes that do not include the US dollar are known as cross currency quotes. Generally speaking, cross currency pairs are not as actively traded as the majors.

Direct Currency Quotes and Indirect Currency Quotes

A currency pair can either be quoted directly or indirectly. A direct quote is where the base currency is the domestic currency. For example, if you are in the United States and looking at the exchange rate of the US dollar against the Canadian dollar then the direct quote would be USD/CAD. If you were in Canada and looking at the rate of the Canadian dollar against the Indian rupee then the direct quote would be CAD/IPR.

An indirect quote is where the domestic currency is the quoted currency. Using the same examples as above, in the United States CAD/USD would be an indirect quote and in Canada IPR/CAD would also be an indirect quote.

The Spread and Bid and Ask Prices

When you trade forex currency in this market, you will be quoted a bid price and ask prices – representing the price at which currencies can be bought and sold. These are quoted in relation to the base currency. If you are looking to buy a currency pair, then the ask price reflects how much the market will sell one unit of the base currency for, relative to the quoted currency. To put it another way, it is how much of the quoted currency is required to buy one unit of the base currency. The bid price is how much the market will pay for quoted currency relative to the base currency, or how much of the quoted currency will be received in return for one unit of the base currency.

For example, you might see the following Forex quote:

USD/CAD = 1.1000/04

In this case, the bid price is 1.1000 and the ask price is 1.1004. Therefore if you were looking to buy this currency pair (ie. buying the base currency) then you would need to pay the ask price of 1.1004. It would cost you 1.1004 Canadian dollars for each US dollar you wished to buy. If you were looking to sell this currency pair (ie. selling the base currency) then you would be paid the bid price of 1.1000. You would receive 1.1000 Canadian dollars for each US dollar you wanted to sell.

The ask price is always bigger than the bid price and the difference between the two is referred to as the spread. In the above example, the spread is 0.0004. The spread is how Forex brokers make their money, as opposed to charging traders commission on trades. Every time you enter and exit a position, you will have paid the spread.

The spread above may also be referred to as 4 pips. A pip is the smallest amount that a currency can move in a currency quote – ie. 0.0001. The exception is for the Japanese yen, where one pip is .01 due to the fact that the Japanese yen is quoted to only two decimal places. A pip might not appear to have much value but as most Forex traders use leverage, price movement of just a few pips can mean thousands of dollars in profit, or loss. You can read more about pips in the Forex market on the page at Understanding Trading Pips.

Currency Abbreviations

Forex quotes are always shown using the currency abbreviations for the respective currencies. The following are the abbreviations for some of the more commonly traded currencies.

  • USD – United States Dollar
  • CAD – Canadian Dollar
  • EUR – Euro
  • GBP – Great British Pound
  • AUD – Australian Dollar
  • INR – Indian Rupee
  • JPY – Japanese Yen
  • CHF – Swiss Franc
  • NZD – New Zealand Dollar
  • AED – Emirati Dirham
  • MYR – Malaysian Ringgit