For many new to currency trading, Forex quotes are one of the more confusing concepts to grasp. If someone is new to using a trading platform, seeing the screens with the letters (currency pairs) and changing numbers all crammed together can be a little overwhelming. Fortunately, once grasped, reading and understanding Forex quotes becomes like second nature to traders.
Now, for some, they believe that understanding Forex quotes are not that important when it comes to the big picture of learning how to trade. We believe that they are wrong. Knowing how to read a forex quote, will help a trader to know if he is using too wide a margin, (and what to do about it) or if the margin conditions are tight enough for a proper trade. They will also let the trader have an appreciation of how trading actually works. (That will always make you a better trader!)
How Does it Actually Work? – How to Read a Forex Quote
Now, if you’ve ever been around MT4 or some type of trading platform, then you’ve probably seen forex trading quotes in action. When a trader first signs in to MT4, the classical outlay shows a table of live forex quotes that the trader can see first-hand (It must be noted that this is not only the way to view free forex quotes, there are websites that offer the same as well. A simple google search of ‘quotes forex’ or ‘forex market quotes’ should yield good results). Now, for many new traders, this can be a bit intimidating, especially if they aren’t so familiar with how a forex quote actually works.
(For those of you who are using MT4, this is Market Watch, located under the View tab. You can also use CTRL+M as a shortcut).
So, how does it work? Well, the first thing that a new trader will notice in when reading forex quotes is that the quote consists of two sets of words. These are actually currency pairs. A currency pair is a way of showing the relationship between two currencies. For example, the EUR/USD shows the relationship between the Euro and the US dollar. The GBP/AUD shows the relationship between the British pound and the Australian dollar. You get the picture.
The next part of the Forex quote consists of a set of numbers. Now these numbers are the bid and ask price of the currency pair. In simple terms, one is the price that you will pay for the currency and the other is the price you would get when selling the currency.
Now to put things into perspective, sometimes you will only see one number when seeing foreign exchange quotes. For simplicity’s sake, we will be using this example first. GBP/USD = 1.2522.
In the currency pair, the currency that falls to the left of the slash, is the base currency, while the currency on the right is the counter currency (Also known as the quote currency). In the GBP/USD, the British Pound is the base currency while the US dollar is the counter currency.
When using quoting forex, the base currency is always 1 unit, while the counter currency shows how much of that currency would be equal to 1 unit of the base currency.
In the GBP/USD = 1.2522 this means essentially that 1 GBP = 1.2522 USD. This means that it will take 1.2522 US dollars to buy 1 British Pound. (As you may have noticed, the GBP and USD are merely abbreviations for the Great British Pound and the United States Dollar).
Getting Deeper – Understanding Forex Quotes
In Forex, there are two main ways that you can quote a currency pair. You can do so directly or indirectly. The direct quote is one where the domestic is the quoted currency pair. The indirect quote is where the base currency. For example if we were looking at the GBP/USD where the British Pound was the domestic currency then the currency would be written like USD/GBP in a direct quote and GBP/USD in an indirect quote.
For most of the Forex spot market, which is what retail traders like us trade, many currency pairs are written with the US dollar being the quoted currency (counter currency). (Examples: GBP/USD, AUD/USD, EUR/USD, NZD/USD).
There are however exceptions where the US dollar is the base currency as is the case with the USD/JPY. If the USD/JPY is quoted at the price of 108.6366, this means that $1 USD to purchase ¥108.63 of Japanese Yen. This is why when US citizens go to Japan, and exchange their $20 USD bills for Yen, they think they have gotten a ton of money.
Now, as we mentioned briefly before, when viewing forex quotes live you will notice that instead of one price there are two, the bid and ask price. To put matters simply, the bid price is the price that you will buy at and the ask price that you will sell at. Of course, these are in the base currency of the currency pair that you are using. Ok, here comes the slightly confusing part.
When you are buying in the market, the ask price is the price that you have to pay in order to buy one unit of the base currency. (It is ok to read that over again.) Remember that Forex stands for Foreign Exchange, so this means that if you are buying one currency, you have to sell another currency in order to get it. For example, for the EUR/USD the ask price is 1.06138. This means that if I want to buy the Euro on this pair, I would have to sell the US dollar at 1.06138 to get 1 Euro.
Now if I wanted to sell (go short), then we would focus on the bid price. This price shows how much of the quoted currency you will gain if you sell a unit of the base currency. (You could also look at it as the price that the market will pay you in quoted currency for selling the base currency).
In a static forex quote it is normal sometimes to see both the bid and ask price expressed in one price. For example, the EUR/CAD = 1.41369/472. The price before the slash is the bid price, and the price after is the ask price. So, if we were supposed to write this the long way, it would be that
EUR/CAD bid = 1.41369 and EUR/CAD ask = 1.41472.
Now, it should be noted that the currency that is quoted first (the Euro in EUR/CAD) is the currency in which the transaction is taking place. So, buying or selling a currency pair, means that you are buying or selling the base currency (again, the Euro in EUR/CAD).
Spreads and Real Time Forex Quotes
Now, that we’ve covered how to read forex quotes, the next step is to understand how this knowledge applies to real time trading. Now if we look at a trading platform like MT4 on a specific price chart, you will notice that different platforms have different prices for the bid and ask price for the same currency. For some platforms, the difference between the bid and ask price is much wider than others. This difference in price is referred to as the spread.
Now for instance, let’s use a former forex market quotes example, the EUR/CAD where the ask price was 1.41472 and bid price was 1.41369. The spread for this currency pair when calculated is 0.00103 or 10.3 pips. This may not seem like a large number of pips, but when we take leverage into account, then these tiny movements have the potential to result in either thousands or loss or gain. This is the thing that attracts many traders to the forex market in the first place. With leverage the forex market’s potential for profit is great.
(Note: it should be noted that for the Japanese Yen pairs, it is typical for them to only have only two to three decimal places, instead of the usual four of five places with other currency pairs. So the USD/JPY price would be written as 108.607).
Words of Caution – Forex Live Quotes Changes
With all the things that we’ve just learned about forex quotes, there must be a word of caution as well. It must be noted that the price of an asset is bound to change, this is after all the point of trading price movements in the forex market. This also means that the bid and ask prices of a currency pair also change frequently. They also do not have to change equally. The spread of a currency pair can vary over a period of time. It must also be noted that there are certain times when spreads expectedly widen and these are times where it is thought to be dangerous to trade.
Usually these are times when it is expected that some important fundamental news is about to break (and usually during the first few minutes of the news coming out as well). Spreads are usually very wide during this time (and also volatility increases, so this means that sharp movements take place spanning several pips. Traders who usually get trapped trading in these conditions with high leverage and on a wide margin usually report either large losses or large gains…usually the former. So, successful traders should take extra caution here.