This article covers the different aspects of foreign exchange rate quotes as received from your forex broker.
Before you start trading live in the forex market, you need to understand how to read the quotes you will be given.
Bid and Ask Prices
Your forex quote will always have a bid and an ask price. These prices are always relative to the base currency.
In the event that you wish to sell the base currency, the bid price will be the price your broker is prepared to pay you to purchase the base currency from you. This is the price you will receive when you dispose of a currency.
In the event that you wish to purchase the base currency, the ask price is set at the price your broker is prepared to sell the base currency to you in exchange for your quote currency. A simple way of looking at this is if you want to purchase a base currency, the ask price that is quote is the price you will have to pay for it.
If you have received a quote for the USD/CAD=1.1000/02, it means that the bid price is 1.1000 and the ask price is 1.1002. This indicates that the number in front of the slash is the bid price and the two digits that are shown after the slash is the ask price. The ask price is quoted by showing the last two digits of the actual price. The bid price should always be lower than that of the ask price. The reason for this is that brokers make their money by the difference between these two figures. They normally purchase at a low price and sell for slightly more.
Pips and Spreads
The variance between the ask price and the bid price in a foreign exchange rate quote is called the spread. The currency movements are generally very small, however the leverage that is available in the market allows you to earn large profits or make large losses.
One pip with a major currency pair would be equal to 0.0001. This applies to all major currencies except the Japanese yen where one pip is equal to 0.01. If you look at it, a pip is representative of a quote’s last decimal point.
If you are provided with a currency quote that does not include the US dollar, it would be viewed as a cross currency quote. The most common cross currency pairs available are the EURGBP, EURJPY and EURCHF. These currencies do not hold the same popularity as those which include the US dollar. Cross currency pairs increases the choice available for traders in the foreign exchange market, even though they are not as popular.
Currencies are traded in different lot sizes. A standard lot is the most common size and is worth $100,000. You can trade in smaller lots, such as a mini lot which is worth $10,000. These may appear to be huge amounts, but the small movements in currencies require that you trade with larger amounts.
Direct vs. Indirect Foreign Exchange Rate Quotes
There are two methods in which to quote a currency pair – indirectly or directly. In a direct quote, the foreign currency is shown as the base currency. In an indirect quote, the base currency is the domestic currency.