Reading a Forex Quote

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Reading a Forex quote may be confusing at first, but will eventually get easier as you get used to it. The major challenge you need to deal with is familiarizing yourself with the different terms associated with the quote. Primarily, codes using three letters are used in identifying and distinguishing the different currencies across the world.

Buying one currency and selling another is always simultaneously done in any Forex transaction. The two currencies involved in the foreign exchange transaction form the currency pair. To identify the current pair, indicate the base currency first, followed by the quote currency or counter currency. A slash would also be found between the two currencies. Two prices will also be posted. The first of these would be the selling or the bid price and the second would serve as the asking price. Similar to the currency pair, a slash should also be posted between the two prices. In indicating the bid price, only the last two decimal places will be posted.

An example of a foreign exchange quote would be USD / JPY 119.68 / 75. Here, the US Dollar is the base currency, while the quote currency is the Japanese Yen. Thus, this sample foreign exchange quote would indicate how many Japanese Yen you would receive for selling one unit of the base currency, which is US Dollars. The selling or the bid price is set at 119.68, while 119.75 serves as the asking price. In this sample foreign exchange quote, the dealer wishes to sell one US Dollar for 119.68 Japanese Yen. In the meantime, the dealer is also willing to buy one US dollar for 119.75 Japanese Yen.

Other important concepts in foreign exchange transactions that you need to be familiar with are the 'spread' and the 'pip'. The spread refers to the difference between the selling or the bid price and the ask price. Pips are the tiny 0.01 units. In our example of USD / JPY 119.68 / 75 mentioned earlier, the spread is 7 pips. Small pips are common among the currencies that are commonly used in trading. A spread of one pip is also a possibility due to intense competition. A small spread is also not automatically proportional to losses or profits.

In foreign exchange trading, a group of currencies are considered as the 'majors', namely the US Dollar, the Japanese Yen, the Euro, the British Pound, the Swiss Franc, the Canadian Dollar, and the Australian Dollar. Meanwhile, US Dollar / Japanese Yen (USD / JPY), Euro / US Dollar (EUR / USD), British Pound / US Dollar (GBP / USD), and US Dollar / Swiss Franc (USD / CHF) are the four most actively traded currency pairs. Dealers usually prefer trading using the majors since these currencies also rank high in liquidity.

In understanding currency prices, a number of factors must also be taken into consideration such as the country's economic and political issues. Issues such as political stability and inflation will have a great influence on currency prices.



Source by Pauline Go

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