Reading a Forex Quote

forex

If you are planning to start forex trading, one of the first things you need to learn is how to read a forex quote. All currencies are quoted in pairs when you’re trading so in order to be able to make decisions about your trading, you need to understand what the quotes mean. Forex quotes may look daunting and confusing at first, but in truth, there is method to them and once you learn how to read them, it will be quite simple.

Currency Pairs

Currency quotes always come in pairs. This is because whenever you trade in currency, you are actually buying one currency and selling another. Here we’ll use an example which we’ll discuss throughout the article to help us understand how to read the quote.

EUR/USD = 1.3601

In this case, EUR is the base currency or transaction currency. The base currency always appears first in the pair. The base currency is the currency that you are buying. USD, in this example, is the quote currency or the counter currency and this is the currency that is being sold.

When a currency pair is quoted, the base currency represents 1 unit of the currency, while the quote amount, is the amount of the quote currency that equals to one unit of the base currency. In our example, 1.3601 USD would equal 1 EUR.

Bid and Ask Quotes

There are two parts to every currency quote – the bid and the ask. You might find this written as EUR/USD 1.3601/04. In this case, the bid price is 1.3601 and the ask price is 1.3604.

These terms come from the perspective of the forex broker, not the trader, so they may seem a bit confusing at first.

  • Bid – The bid price is the price that you’ll pay if you’re selling a currency. In other words, you’re accepting the broker’s bid. In this case, the bid price is 1.3601.
  • Ask – The ask price is the price that the broker will ask for if you’re buying. Remember that this is from the perspective of the broker, so the broker will ask for slightly more when you’re buying. In this case, the ask price is 1.3604.
  • Spread – The difference between the bid price and the ask price is called the spread and this amount is essentially the broker’s commission.

Pips

A pip is an important term to understand in forex trading. It stands for Point in Percentage and it is the smallest amount that a currency pair can change. A pip is how profit and loss is measured in currency trading. A pip is usually the fourth decimal point in a currency quote so in our example, if the currency moved from 1.3601 to 1.3604, it would have moved 3 pips. In cases when the currency is listed in smaller denominations, the pip may be the 2nd decimal point. Any decimal points listed after the pip, are known as fractional pips or pipettes.

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