The way in which FX rates are quoted can cause newcomers to the market to become confused. Before you commence trading, you need to know how to read a forex quote.
Reading a Quote
Currency quotes are done in pairs where the value of one currency is reflected relative to the value of another currency. For example, if you wanted to find out what the FX rates are between the US dollar and the Japanese yen, you would receive a quote that reads: USD/JPY=111.25. This is what is called a currency pair quote. The US dollar value is the base currency, whilst the Japanese yen value is the quote currency. The base currency is normally equal to one unit which in this example means the US dollar is equal to $1. The quote currency is the value of one unit of the base currency in the alternate currency. In this example it indicates that if you had one US dollar, you would be able to obtain 111.25 Japanese yen for it.
Direct vs. Indirect Pairs
Currency pairs are normally quoted as either direct or indirect pairs. If the domestic currency is the base currency, it would be viewed as a direct pair. If the domestic currency is the quote currency, it would be viewed as an indirect pair. For example, it you received a quote where the Australian dollar is your domestic currency and the US dollar was the foreign currency, a direct quote would be indicated as AUD/USD, whilst an indirect quote would be indicated as USD/AUD. When you look at a direct quote, the value of the foreign currency varies and the domestic currency is equal to one unit. With an indirect quote, the domestic currency will be indicated as a variable amount, whilst the foreign currency is equal to one unit.
FX rates are generally quoted to four decimal places. There is one exception to that rule and that is the Japanese yen which is quoted to two decimal places.
Cross Currency FX Rates
A cross currency quote is when the US dollar does not form part of the quote. The most common versions of a cross currency pair are EUR/GBP, EUR/CHF and EUR/JPY. The trading possibilities of the cross currency pairs are not as popular as pairs that include the US dollar. However, it does expand the trading possibilities.
All trades have a bid price and an ask price. When it states that you are going long, it means that you are in the process of buying a currency pair. This means that the ask price will be the amount you have to pay to buy a single unit of the base currency.
In the event that you are going short, it will indicate the value of the quote currency you will receive if you sell one base currency unit. An example of this is GBP/USD=1.5800/05. This shows the bid price of 1.5800 and the ask price is 1.5805. The price on the left of the equation can be recognised as the bid price. The two digits after the slash is representative of the ask price. The bid price must always be less than the ask price.
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