Forex Trade Quotes
When you trade currency pairs, the quote will consist of an ask and a bid price. These prices are always linked to the base currency. When you are selling your base currency, the bid price will be the price at which the dealer is prepared to buy that base currency from you. This is the price you will receive if you wish to sell.
When you are purchasing the base currency, the ask price is set at the level the dealer is prepared to sell it to you for. This is the price that you will have to pay for a base currency.
An example of this is USD/CAD= 1.1000/10. In this instance the bid price is 1.1000 and the ask price is 1.1010. Let’s say you wanted to buy this currency pair. You would be buying USD with CAD. If you look at this quote, it will cost you C$1.1010 to buy US$1. If you wanted to sell the USD, you would receive C$1.1010 for US$1.
Pips and Spreads
The variance between the ask and the bid price in a forex trade quote is called the spread. In the example used previously, the spread is .0010, or 10 pips. A pip is a common name for the changes in a quote. One pip would be equal to .0001. A pip is normally representative of the last decimal place in a quote.
Forex Trade Lots
A standard lot in the foreign exchange currency market is $100,000. You do find smaller lots, such as mini-lots which have a size of $10,000. Although these lots appear to be quite large, the small amounts that currencies move at require these large amounts to enable larger profits or losses.
Direct vs. Indirect Quotes
Currency pairs can be quoted in two manners, indirectly or directly. A direct quote is where the foreign currency is shown as the base currency and an indirect quote is where the domestic currency is indicated as the base currency. If you are based in Britain for example and the British pound is your domestic currency, a direct quote would indicate an amount of pounds for a fixed amount of the other currency in your pair. A British institution providing you with a quote of £0.60 per $1 would indicate a direct quote. If the institution provided you with a quote of $1.50=£1, it would indicate an indirect quote.
A cross currency quote is a quote that excludes the US dollar as part of the pair. The most common cross currency pairs include EUR/GBP, EUR/JPY and EUR/CHF. Cross currencies generally increase the choices available for the investor or trader, but these are normally not as popular as pairs that include the US dollar.
Understanding the basics of the forex trade will allow you to trade effectively in this liquid market. Before you commence trading, you should ensure that you know how to interpret a forex quote and know the meaning of pips and spreads. This is vital for you to continue to other more complex levels of understanding this market.