Interpreting a Currency Pair

To interpret and understand a FOREX quote you need to know the terminology. The first thing to understand is “currency pair” which tells you which two currencies are being compared to each on the Foreign exchange.

When you get a quote involving a currency pair it is in the form of a bid and ask price. The major currency pairs involve the dollar. The bid price is what you have to pay(eg per dollar) to buy the second currency. The ask price is the price(per dollar) that you get when you sell the second currency. The difference between the two prices is known as the spread.

When you comfortable understand these words then you will be capable of setting up your first currency trades.

What is a Forex Quote?

Understanding Forex Quote

A forex quote is based on two currencies. The left side(1st) currency is the base currency (most often the dollar). The right side (2nd) currency is the quote currency. The pair taken together give you the exchange rate between the two currencies. Example quote pair GBP/JPY = the Pound to the Yen.

The major currency is the USD (US dollar). Major currency pairs involve the USD and one other minor currency, such as EUR(euro),GBP(pound sterling),JPY(Japanes Yen). Any quote pair not involving the USD but only other major currency is known as a cross pair.
If you are trading using a dollar based account then your quotes will be in dollars(base currency) against another currency(quote currency). But if you have a Euro account then your quotes will use the EUR as the base currency and the dollar(or other currencies) will be the quote currency. Likewise, if you have a GBP account then the pound will be the base currency.

An example of a EUR based quote:
EUR/USD = 1.0921
Which means for ever 1 Euro you sell you will buy 1.0921 US Dollars at a particular point in time.
The base currency is always equals 1. The quote currency equals how much 1 base currency(eg dollar) will buy you in terms of the quote currency.
In FOREX EUR is usually the base currency against the USD.
If we used the USD as the base then the quote would look different even though they would still have the same ratio. This is the indirect quote.
USD/EUR = .9167
Meaning for the sale of 1 US dollar I would get 0.9167 Euros in return.

What is a BID and an ASK quote?

The previous quotes are mid quotes. But in real life there are two prices. One is the buying price and one is the selling price.
Symbol        Bid           Ask            Spread
EURUSD    1.09354    1.09360     0.60
The bid price above is 1.09354, the ask price is 1.09360.

Broker’s Bid and Ask

A bid price is not the price you’ll bid when you want to buy a currency pair. it is the price a broker is bidding. You are buying the Ask price which is slightly more expensive and selling the Bid price which is lower.
Using the above example, if you are interested in buying EUR, the base currency, you’ll pay the broker’s ask quote, which is 1.09360 USD. So if you were buying 1000 EUR you would pay 1,093.6 USD
If you were selling, you’d accept the broker’s bid quote at 1.09354. If you were selling 1,0935.40 USD you would receive 1000 EUR.
The spread is the gap between the bid price and the ask price. This is how the broker makes money on the exchange.

PIPs and PIP spreads

An important measure of price in FX is the PIP. It is usually the smallest unit of price in an FX quote.
In the example:
Bid        Ask
EURUSD 1.0935   1.0939
The difference between the bid and ask is .0004 which is 4 pips. This is the spread. The spread between the two prices is 4 pips.

Forex PIP location

Quotes with non-JPY currencies are usually to 4/5 decimal places. Quotes with the JPY have 2/3 decimal places because the Yen has quotes in the hundreds of YEN whereas most currencies have quotes in single digits, mostly 1.