Forex quotes are the price of one currency in terms of another currency. Quotes always consist of currency pairs because when you buy one currency, you are simultaneously selling another. For example, the price of one euro could be $1.1135 for the EUR/USD pair.
What are Forex quotes?
The International Organization for Standardization (ISO) develops and publishes international standards and applies them to the world’s currencies. Each country’s currency is abbreviated to three letters. For example, the Euro is shortened to EUR, the US Dollar to USD, the British Pound to GBP, and the Japanese Yen to JPY.
Forex quotes are represented by two currencies: the base currency, which is listed first, and the quote currency, which is listed last. The price of the first currency is always reflected in units of the second currency. For example, for EUR/USD, one euro will cost one dollar, 11 cents and 35 points.
A pip is the smallest unit of measurement in a Forex quote. In the example EUR/USD = 1.1135/1.1136, the difference between 1.1135 and 1.1136 is 1 point.
Regardless of which currency is the base currency, it is always equal to 1. The specified amount of 1.1135 is equal to the amount of the quote currency. For the US dollar, it is equal to 1 euro, a unit of the base currency.
Majors, crosses and exotics
Most of the currencies you will deal with as a forex trader will be quoted against the US dollar. Among the major currency pairs, only two have the US dollar as their base currency: USD/JPY and USD/CHF. The first pair is easy to read as it is simply the US dollar versus the Japanese yen. Whereas CHF refers to the old Roman name for Switzerland, which is known as the Confederation of Helvetica (Confoederatio Helvetica).
Combinations of the world’s eight most popular currencies include: US dollar, euro, pound sterling, Australian dollar, New Zealand dollar, Canadian dollar, Japanese yen and Swiss franc. These pairs are called majors. They read as follows: EUR/USD, GBP/USD, AUD/USD, NZD/USD, CAD/USD, USD/JPY and USD/CHF.
Currency pairs consisting of major currencies that do not include the US dollar are called crosses and include: EUR/GBP, GBP/JPY, CHF/GBP, etc.
All other currency pairs in the forex market are usually called exotic pairs.
Aliases for currency pairs
Sometimes new traders may have difficulty understanding forex quotes because some popular currencies have nicknames that are often used as slang by traders.
A country | Currency | Sign | Code | In traders’ jargon |
---|---|---|---|---|
USA | U.S | $ | USD | Dollar |
Europe | Euro | € | EUR | Euro |
Great Britain | Lb | £ | GBP | Cable |
Japan | Jena | ¥ | JPY | Jena |
Australia | Australian dollar | $ | AUD | Ozzy |
New Zealand | New Zealand dollar | $ | NZD | Kiwi |
Canada | Canadian dollar | $ | CAD | Looney |
Japan | Jena | ¥ | JPY | Jena |
Switzerland | Swiss frank | ₣ | CHF | Swissy |
Bid and Ask prices, spread
The Bid price (sale price) is the price at which traders can sell the currency, and the Ask price (buy price) is the price at which traders can buy the currency. Bid and Ask prices are indicated from the broker’s point of view. Traders buy currencies at the bid price and sell at the ask price.
From the broker’s point of view, when you are a potential buyer, he will charge you more than if he were selling. In the example above, since you are interested in buying EUR, the base currency, you pay the Ask price, the broker price, which is $1.1132. If you were selling, you would accept the broker’s price, which is $1.1131.
Traders will always tend to buy currencies when the price is low and sell when the price rises. Or they may sell the currency in the expectation that it will depreciate and then be able to buy it back at a lower price in the future.
The difference between the Bid and Ask prices is called the spread. A spread is a type of commission that you pay to your broker for each trade.
Direct and reverse quotes
Quotes are often displayed according to the country in which you live. The direct quote for US traders looking to buy Euros will be EUR/USD and will be relevant to US citizens. This quote will give US citizens the price for one euro in terms of their currency, which will be 1.1135.
An inverse quote is essentially the inverse of the base currency. It shows the cost of one unit of national currency in terms of foreign currency, for example EUR/USD.