Forex quotes
As we all know the Forex Market is the largest one in the world, also your institution or/and broker that you are trading with collect quotes from a centralized feed or individual quotes comprising of interbank rates. The main question is: How are these forex quotes made up? And the answer is: currencies are traded in pairs and are each assigned a symbol. For example: the Japanese Yen it is JPY, the US Dollar is USD, for the Pounds Sterling it is GBP, for Euro it is EUR, for the Swiss Frank it is CHF and so on. As you already know - EUR/USD would be Euro-Dollar pair.
Mostly you will see the USD quoted at first time with some exceptions like Euro Dollar, Australia Dollar, Pounds Sterling, New Zealand Dollar and others. The first quote is known as the base currency. When you see forex quotes you will actually see two numbers. And that is something common. The first number is called the bid and the second number is called the offer - you will see it somewhere like ASK.
USD/JPY: 112.46 - Seconds later - 112.51
The first part before the first dash refers to the bid price. In other words it’s what you obtain in JPY when you sell USD. In example above, the bid price is 112.46. The second component, which comes after both dashes and usually occurs minutes or seconds later, is used to obtain the ask price, this is what you have to pay in JPY if you buy USD. In this example, the ask price is 112.51. The difference between the bid and the ask price is called the spread. In the example above, the spread is .05 or 5 pips. USD/JPY: 123.50
When you see a Forex Currency pair price quote, like the one above, just remember that that last digit of the price (after the decimal point) is referred to as the pip. So if you see a quote (118.50) and then a qu.ote in one minute of (118.51), then you should automatically know that the price rose by 1 pip. Similarly, if you see a price quote of 118.58 and then after 5 minutes it’s 118.50, the price dropped by 8 pips. The pip is always the last decimal place of the currency price quote.
Since we have a currency PAIR such as EUR/USD, we need a way to talk about its price value. Whenever you see a FOREX price quote, you will see something listed along the lines of the following:
If we use the EUR/USD as an example you might see 0.9950/0.9955 the first number 0.9950 is the bid price and is the price traders are prepared to buy Euros against the USD Dollar. The second number 0.9955 is the offer price and is the price traders are prepared to sell the Euro against the US Dollar.
These quotes are sometimes abbreviated to the last two digits of the currency such as 50/55. Each broker has its own convention and some will quote the full number and others will show only the last two. You will also notice that there is a difference between the bid and the offer price and that is called the spread. For the four major currencies the spread is normally 5 give or take a pip.
To carry on from the symbol conventions and using our previous EUR quote of 0.9950 bid, that means that 1 Euro = 0.9950 US Dollars. In another example if we used the USD/CAD 1.4500 that would mean that 1 US Dollar = 1.4500 Canadian Dollars. The most common increment of currencies is the PIP. Currencies in the FOREX market are traded on a price interest point (pip) system. Each currency pair has its own pip value.
With these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means that the USD is weakening, because it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
Nearly all the brokers you will deal with will work all this out for you. They may have slightly different conventions, but it is all done automatically. It is good however for you to know how they work it out. In the next section we will be discussing how these seemingly insignificant amounts can add up.
In summary, currency traders must become familiar also with the way currencies are quoted. The first currency in the pair is considered the base currency; and the second is the counter or quote currency. Most of the time, U.S. dollar is considered the base currency, and quotes are expressed in units of US$1 per counter currency (for example, USD/JPY or USD/CAD). The only exceptions to this convention are quotes in relation to the euro, the pound sterling and the Australian dollar - these three are quoted as dollars per foreign currency.
With these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means that the USD is weakening, because it now takes more U.S. dollars to equal one pound, euro or Australian dollar. To sum up this point, if a currency quote goes up then it increases the value of the base currency. A lower quote means that the base currency is weakening. There are some currency pairs that do not involve the U.S. dollar. These currencies are called cross currencies, but the idea is exactly the same. For example, a quote of GBP/JPY 210.95 signifies that one GBP is equal to 210.95 Japanese yen.
Of course there are exceptions to this rule and these are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, indicating that one British pound equals 1.4366 U.S. dollars. These currency pairs are like this because they are stronger than the USD in value.
Forex quotes always include a bid and an ask price. The bid is the price at which the market maker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the market maker is willing to sell the base currency in exchange for the counter currency. The difference between the bid and the ask prices is referred to as the spread. The cost of establishing a position is determined by the spread, and prices are always quoted using five numbers (for example, 134.85), the final digit of which is referred to as a point or a pip.