The first thing that most Forex traders learn when studying the financial markets is reading Forex quotes. In Forex, currencies are always quoted in pairs. This permits you more options to trade than you get in other markets. Unsurprisingly, interpreting price quotes is a skill that every trader aspires to be fluent in.
Although it can look daunting, it’s actually quite easy to evaluate Forex quotes once you get the hang of it, and the fastest way to learn is by considering some examples.
Reading a quote
A Forex quote always consists of two currencies; a currency pair consisting of a base currency and a quote currency. The reason that currencies are quoted as a pair is because in every foreign exchange transaction you are simultaneously buying one currency and selling another.
Here’s an example: EUR/USD = 1.17000
In this case we have two currency symbols separated by a slash – EUR, which is the currency code for the European Union euro, and USD, which is code for the United States dollar. The first currency listed is referred to as the “base currency” and the second currency listed is considered the “counter currency” or “quote currency”. So in EUR/USD, the Euro is the base currency and the United States dollar is the quote currency.
So what does the above quote tell us? It means that 1 Euro is able to buy 1.46 units of the US dollar or in other words, 1 Euro is worth 1.46 dollars. An important point to remember is that the base currency always equals one.
When it comes to placing a trade, you take a position in terms of the base currency. So if you buy a pair, you are buying the base currency. Similarly, if you sell a pair, you are selling the base currency. Now it can be easy to understand that you are doing the exact opposite with the quote currency. So if you buy EUR/USD this simply means that you are buying Euro and selling the US Dollar.
When you buy the base currency and selling the quote currency, you are entering into a long position. If you instead sell the base currency and buy the quote currency, you are entering into a short position. Looking back at our EUR/USD example, if you buy EUR, you are going long; if you buy USD, you are going short.
Bid and Ask price
In Forex you will always come across a two-sided quote – the bid and ask. The bid and ask prices are always quoted in relation to the base currency.
The bid is the price at which the dealer is willing to buy the base currency from you in exchange for the quote currency. Simply put, it is the price you receive when you sell. The ask price is the price at which the dealer is willing to sell you the base currency in exchange for the quote currency. So ask is the price at which you can buy. Let’s consider an example to better understand the bid/ask concept: EUR/USD = 1.17000/1.17016
Here the bid is 1.17000 and ask is 1.17016. So the whole quote says – one Euro is worth 1.17000 US dollars if you are selling or 1.17016 if you are buying.
If you believe that the US Dollar will continue to fall in value against the Euro, you will execute a BUY on the EUR/USD pair. Now you have bought Euros at 1.17016 in the expectation that they rise versus the US Dollar.
But if you think that the Euro will weaken against the US Dollar, you would execute a SELL on EUR/USD. By doing so you would have sold Euros at 1.17000 in the expectation that they fall against the US Dollar.
The bid price is always lower than the ask price. This is important to remember. From the broker’s perspective, when you are the potential buyer, the broker will ask for a little more than what he might be willing to bid if you were selling.
The difference between the two prices is called the “spread”. There’s always a spread in even the most liquid markets, and it is determined by the price providers and liquidity in the market at any given moment. Let’s consider our running example of EUR/USD priced at 1.17000/1.17016. The difference between the bid and ask price here is 0.00016. This is the equivalent of saying the spread is 1.6 pips or 16 ticks.
Pip and Tick
Pip: A term you’ll often hear in Forex is pip. A pip is the smallest measure of change in value of a currency pair. It is a standardized unit, usually 0.0001 in the case of the U.S Dollar. With the Japanese Yen, one pip would be 0.01 since the currency is quoted in two decimal places. So, for example:
EUR/USD = 1.1700/1.1702, the difference between the bid and ask price is 0.0002, or 2 pips, which is the spread.
USD/JPY = 110.10/110.12, the difference between the bid and ask price is 0.02, or 2 pips.
Tick: The minimum upward or downward movement in the price of a currency pair. Since 2001, with the advent of decimalization, the minimum tick size is 0.00001 for almost all currency pairs, in exception to the Japanese Yen pairs which is 0.001.
Example: EUR / USD: 1.17000/1.17016, the difference between the bid and ask price is 0.00016, or 1.6 pips which is 16 ticks. That gave the trader better quoting.
USD/JPY = 110.100/110.118, the difference between the bid and ask price is 0.018, or 1.8 pips which is 18 ticks. That gave the trader better quoting.
Now that you know how to read and interpret Forex quotes, you are one step closer to becoming a successful trader! Always remember that one quote is only valid for a fraction of a second. Forex is a speculative market, and so great price fluctuations can occur within the scope of minutes, especially at times of market tension. So a trader must not only know the price quote at a given moment, but should also be aware of the overall sentiment towards the particular currency pair that influences the quote before deciding to make a trade.