Today, I am going to show you ”How to Read a Forex Quote” in case you have been asking yourself how.
In forex, currencies are always grouped in a pair, such as GBP/USD ,USD/JPY or EURUSD. It’s grouped this way because in every foreign exchange transaction, you are simultaneously buying one currency and selling another.The example below shows what is the base and quote currency for easier understanding.
As a trader, its important to know how the pairs are grouped. The pairs are categorized as major or minors.
All the major pairs are 8 in number;
USD, EUR, GBP, CAD, JPY, CHF, NZD, and AUD.
Its very good to understand how these pairs are grouped for one, if you group them correctly you will save on the spreads for example
if you say NZDGBP will have a higher spreads than GBPNZD. Many brokers out there have different arrangements and some just want to have a higher spread. I have found a reliable broker who will conventionally group these pairs as they are supposed to be, IC Markets ECN Broker
| USD | EUR | GBP | CAD | CHF | JPY | AUD | NZD |
| EURUSD | EURUSD | GBPUSD | CADJPY | CHFJPY | USDJPY | AUDCAD | NZDUSD |
| GBPUSD | EURGBP | GBPCAD | CADCHF | EURCHF | EURJPY | AUDCHF | NZDCHF |
| AUDUSD | EURCAD | GBPNZD | USDCAD | GBPCHF | GBPJPY | AUDJPY | NZDCAD |
| NZDUSD | EURNZD | GBPJPY | EURCAD | CADCHF | CADJPY | AUDNZD | NZDJPY |
| USDJPY | EURJPY | GBPNZD | GBPCAD | AUDCHF | CHFJPY | AUDUSD | EURNZD |
| USDCHF | EURAUD | GBPCHF | AUDCAD | NZDCHF | AUDJPY | EURAUD | GBPNZD |
| USDJPY | EURNZD | EURGBP | NZDCAD | USDCHF | NZDJPY | GBPAUD | AUDNZD |
From the example of the British Pound versus the U.S dollar; the first currency to the left of the slash is called base currency while the second one is the on the right is called the counter or quote currency. (USD).
The first currency determines if you are selling or buying. If you place a buy trade, it means that you are buying GBP while at the same time selling the USD. In case you place a sell trade ( short position) you are selling GBP while at the same time buying the USD. When buying, the exchange rate will determine how much you need to pay for one unit; this means that, Base currency is always 1 equivalent to something.( quote currency.)In the example above GBPUSD=1.51258 it means that for you to buy 1 GBP you need 1.51258 of the USD.
When selling, the exchange rate tells you how many of the quote current you get when selling one unit of the base currency.
As per the example above, you receive 1.51258 U.S dollars when you sell 1 GBP.
In simple term, you buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency. Again, you will sell the pair if you think that the base currency will depreciate or lose value relative to the quote currency.
Buy/ Short Position.
What is the first thing I need to know is if I want to buy or sell?. If you want to buy it means that you will be buying the base currency and sell the quote currency simultaneously. In this case, you will want the base currency to appreciate and then sell at a higher price. When you hear traders saying ‘going long’ they simply mean, buying so, long = buy.
If you want to sell; that is, you are selling the base currency while buying the quote currency, you want the base currency to fall in value and then you would buy it back at a lower price. This is called ‘going short’ or taking a short position. Short = Sell.
The bid, ask and spread.
All forex quotes are given into two prices that is bid and ask. You as a trader should know that, bid is lower than the ask price.as shown below.
The bid price. This is the price your broker is willing to buy the base currency in exchange for the quote currency. The ask price ( offer price) on the other hands is a price at which your broker will sell the base currency in exchange for the quote currency. Spread is define as the difference between the bid and the ask price.
On the EURUSD quote above, the bid price is 1.34568 and the ask price is 1.34588.
To simply this as per our definitions above, if you want to sell Eur. You click ‘sell’ and you will sell euros at 1.34568 and in case you want to buy EUR, you click BUY and you will buy euros at 1.34588.
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The illustration below will summarize all what we covered.
Understanding basics of how to read a forex quote in trading is important as you will always be ahead of the game by calculating the spread your broker is offering. Always use brokers that provide reasonable Spreads.
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