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Written by: PaxForex analytics dept - Monday, 26 March 2018 0 comments
One of the first tasks new forex traders need to master is to understand forex quotes as this is the way currency pairs are priced and displayed to traders. It gives vital information about any given pair and key from anything related to technical analysis to fundamental analysis. Key aspects to understand are base and quote currency, bid and ask price and direct as well as indirect quote. Spread, pips and cross currency round up the vital pieces of information forex traders will receive from a forex quote.
In the forex market currency pairs are used in order to get the exchange rate. This means that there will always be two different currencies in order to create one currency pair. The most popular traded one is the EURUSD and due to its popularity it is also the one which carries the highest volume per trading day. The first currency of every currency pair, in our example the EUR, is referred to as the base currency. The second currency, in our example the USD, is known as the quote currency. This means that if the EURUSD is trading at 1.2400, a forex trader who would exchange 1 EUR would receive $1.24.
Remaining with our EURUSD example, if a trader is analyzing the Euro against other currencies then the EURUSD would be an indirect quote. On the other hand, a direct quote would be the USDEUR. A direct quote is always a currency pair where the analyzed currency is the quote currency. An indirect quote is the exact opposite, where the analyzed currency is the base currency. Here is another example, the USDJPY. A trader who is analyzing the US Dollar would get an indirect quote with the USDJPY and a direct quote with the JPYUSD.
In a direct quote, the analyzed currency is always a variable and the counter currency is always fixed. In an indirect quote, the analyzed currency is always fixed while the counter currency is a variable. This means that in a direct quote, a forex trader will always assess how much of an analyzed currency is required in order to purchase the counter currency. In an indirect quote a forex trader will know how much in a counter currency would be received if the analyzed currency is sold. Here is an example, using the EURUSD. A trader who wants to know how many US Dollars
would be exchanged for 1 Euro would require a direct quote or the EURUSD. A trader who would like to know how many Euros are needed in order to purchase 1 US Dollar would require an indirect quote or the USDEUR.
A currency pair always has two prices, a bid price and an ask price. The bid price is the price a forex trader will pay for selling a currency pair while the ask price is the price for buying a currency pair. The bid price is always lower than the ask price and the difference is known as the spread. Forex brokers earn their revenues from the spread and the lower the spread, the higher the profits for traders. Spread are usually tight for major currency pairs and increase for minor and exotic currency pairs. The less liquid a currency pair is, the smaller the market and therefore the higher the spread.
The EURUSD usually carries a spread of less than 1 pip. A pip is the smallest fraction a price can move if the currency pair is quoted with four decimals. When the five decimal system is used, the smallest fraction a price can move is referred to as a pipette. 10 pipettes equal 1 pip. In times of high volatility, spreads usually increase due to supply and demand which is one of the key drivers of price action. Some forex brokers offer a smaller spread, but compensate by charging a commission usually per 1 standard lot or 100,000 currency units traded. Forex traders should therefore not only look at the spread, but be aware of potential commissions charged. A good spread for the EURUSD, without commissions is between 0.5 and 0.9 pips.
Any currency pair without the US Dollar as either its base or quote currency is known as a cross currency. The most popular cross currency is the EURGBP. Cross currencies offer forex traders a great way to diversify their trading accounts or to hedge their positions. While the forex market is decentralized and open for trading 24/5, any US Dollar related currency pairs remain the most actively traded, followed by minor currency pairs and then by exotic currency pairs. Forex quotes give traders a great amount of information and should therefore be fully understood in order to identify profitable trades.