How to Read Forex Currency Quotes
What Do the Forex
Trading Pairs Mean?
This article will help you understand more about forex trading pairs, what they represent and how they are interpreted. The main topics surrounding forex pairs discussed below will include how to read a quote, bid/ask prices, what is the spread, and direct vs indirect quotes.
How to Read a Forex Pair Quote?
A forex quote will always include two currencies. The base currency and the quote currency. The base currency will always come first and the quote currency will come second.
The International Organization for Standardization (ISO) created an international system for global currencies. The system has simplified each country's currency into a three letter abbreviation. For example the Euro is EUR and the US Dollar is USD.
Therefore a quote for the Euro against the US Dollar will look something like this, EURUSD = 1.10394.
What does this mean? Here you are essentially pricing one currency in terms of another currency. In simple terms, 1 EUR is equal to 1.10394 USD. Therefore, if you would like to buy 1 EUR you must pay 1.10394 USD.
What Are the Bid and Ask Prices?
Now that we understand what a quote is we can move onto the next level. Each forex pair will have two prices. You will have the bid price (sell price) and you will have the ask price (buy price). The idea behind the bid and ask price is to create a market for the specific forex pair. The prices will continue to move up and down depending on the demand and supply for the forex pair. When buyers and sellers are happy with the price they see they are matched and trades go through. The difference between the bid and ask price, also known as the spread, will go to the broker.
The Spread
When trading forex pairs you will notice that the ask price (buy price) is almost always higher than the bid price. In some scenarios the bid and ask price are the same. Here you are experiencing a zero spread. If the ask and bid price are not the same, then you have a spread. The spread is how the broker earns money. It can be seen as a fee for executing your trade. The smaller the spread, the cheaper the fee. Forex pairs with small spreads are generally widely traded with high trading volume and liquidity.
Direct vs Indirect Quotes
Direct quotes will be in line with the currency you predominantly use. For example if you are a US citizen and mainly use USD, then a quote for EURUSD = 1.10394, is considered a direct quote. This quote shows US citizens how many US Dollars are needed to purchase 1 Euro.
An indirect quote would be the inverse of this. To calculate this you divide the direct quote by one. 1/1.10394 = 0.90584. This is useful when you are exchanging Euros back into USD. It is telling you for every 0.90584 Euros you have, you will get 1 USD.
For more information on forex pair quotes, please feel free to get in touch with us. We would be more than happy to discuss with you. Also we encourage you to download our Forex Beginners User Guide.
