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Understanding Forex Quotes

Reading Forex quotes is easy although it looks a bit confusing at the beginning.

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 Britain Pound are acting as the base currency. Base currency in a Forex quote will always has 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, Spread, and Pip

There are sometimes that you can only see one price but often currency exchange price are display in pairs with 'bid price and 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.)

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

To help beginners get used to the Forex quotes, here are some quick examples:

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

EUR/JPY 127.95/128.00

• 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

GBP/USD 1.7400/10

• 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

USD/JPY 119.8

• Base currency= USD
• No bid-ask price is displayed, spread value not available.
• Pip value= 0.1

Getting used to the quotes now? Well, don't feel down if you're still slow... you'll be picking up on reading them as you move along. Moving forward, we will take a look on Margin Trading in Forex market.

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