Understanding Forex Quotes
Reading Forex quotes is easy although it looks a bit confusing at first.Quoting Foreign Currency
Currencies are always quoted in pairs. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed.The first currency in the quotes act as the 'base currency'.
For example USD/JPY, EUR/GBP, and GBP/AUD, in such cases, USD, Euro Dollar, and British Pound are acting as the base currency. The Base currency in a Forex quote will always have a value of 1. 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 Dollar.
FX Quoting: Bid/Ask and Spread
Sometimes you only see one number in the quote but often currency exchange prices are displayed in pairs with the 'bid price and the ask price'.For example EUR/USD 1.2385/1.2390, 1.2385 is known as the bidding price, while 1.2390 is the asking price. Bidding price is the price that you sell the base currency (EUR in our case here); asking price is the price that you buy the base currency. The different of the bidding and the asking price is called 'spread'.
You might notice that bidding price is always lower than the asking price. Ever wonder why? The different of the bid-ask price (socall 'spread') is how currency brokers make profits without charging commissions to their clients (sell high and buy low in the same time.)
What's a pip?
A pip is the smallest value in a Forex quote. Take our example earlier on EUR/USD. If the exchange rate goes from 1.2385 to 1.2386; that's one pip. In mathematical definition, a pip means the last decimal place of a quotation.Note that as each currency has its own value, the value of a pip is different from one another. Say USD/JPY rate at 120.75, a pip would be 0.01 (the second decimal place); while for EUR/USD 1.2385, a pip would be 0.0001 (the fourth decimal place).
Example of Forex Quotes
Confused about the quotes? Don't worry too much about it, you'll get used to them as soon as you move on and start your trading.For the beginners, here are some quick examples. Try not tolook at the answer and determine the value of bid price, ask price, spread value, and the pip value.
EUR/USD 1.2385/1.2390
- Base currency= Eur
- Bid price= 1.2385; Ask price= 1.2390
- When selling Euros, 1 Euro = USD$1.2385; when buying Euros, USD$1.2390 = 1 Euro.
- Spread = | 1.2385 - 1.2390 | = 0.0005
- Pip value= 0.0001
- Base currency= Eur
- Bid price= 127.95; Ask price= 128.00
- When selling Euros, 1 Euro = JPY127.95; when buying Euros, JPY128.00 = 1 Euro.
- Spread = | 127.95 - 128.00 | = 0.05
- Pip value= 0.01
- 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
- Pip value= 0.0001
- Base currency= USD
- No bid-ask price is displayed, spread value not available.
- Pip value= 0.1
