A Little In-Depth Understanding of Forex Quote
You need to understand, and become familiar with, the terminologies in forex trading. If you know what is a currency pair, this tells you what is involved in the trade, specifically the currencies.
When it comes to quoting, you have to know that the currency pair is sometimes followed by the ask price and bid price. This will reveal the spread which involves the number of pips, the broker’s bid and the ask price.
These terms need a little in-depth understanding, as this will enable you to be ready for your initial trades.
Start with the Currency Pairs
When we speak about forex quotes, it will always consist of two currencies. The first is the currency pair, which includes the base currency, and the other one is the quote currency. The quote currency is sometimes called the counter currency, so it will be better for newbies to get familiarized with this term as well. The pairs represent the currencies you are trading. Remember, the first part of the pair is the base currency, and the second part is called the quote currency.
The most popular base currencies are the Euro, the British Pound, AUD, and USD.
Remember that the quote currency can be any currency, which includes other common base currencies; this is an example below:
EUR/USD = 1.3600
As you can see, the Euro is the base currency, and the USD is the quote currency. When translating this, it would become “one Euro is worth 1.36 Dollars.”
The base currency doesn’t matter, whether it is USD or EUR, or any other currency, the base currency will always be equal to 1. From the example above, 1.3600 is the quoted amount for the quote currency, which is the USD, and that is the amount it takes to equal 1 unit of the base currency, which is the EUR.
When it comes to forex conventions, and the time over which these two currencies are compared, the Euro will always be the base. However, if the USD happened to be the base currency, then the quote would be:
USD/EUR = .7352
So what does this hypothetical quote mean? This means that 1 USD equals to .7352 Euros. You could just divide 1 by .7352, the result would be 1.36, and as you can see, the result is the same as in the first example. so the relationship between the currencies remains the same.
The Bid and Ask Price Quotes
Forex quotes have two parts, mainly the bid price, and the ask price. To clear things up, see this sample below:
EUR/USD = 1.3600/05
The sample above shows that the bid is 1.3600, and the ask is 1.3605. Remember that the difference between a bid and ask price will be a tiny fraction, provided that it is in normal circumstances. This one is less than 1/100th of the currency unit. Only the last two digits of the four digits are shown. If you want to write it down formally, it would be the following:
EUR/USD = 1.3600/1.3605
Now, what you can see above is the bid price that is 1.3600, while the ask price is 1.3605.
What are Bid Prices and Ask Prices really?
You may have heard about this before as you have been exploring the forex market. You have to know that the bid price is not the price that you will bid when buying a currency pair, but it is from the perspective of the forex broker that these two terms are used. In real life, the broker will ask what he might think he is willing to bid when you are selling, especially as you are a potential buyer. From the example above, say you are interested in buying EUR, then the base currency, you will pay the ask, including the broker’s asking price which is 3.3605.
As a seller, you would definitely accept the broker’s bid, which is equal to 3.3600.
At first, you might find these terms confusing. Just keep in mind that these bid and ask prices are from the broker’s perspective, definitely not yours. You will pay what the broker is asking for the currency when you are buying. From the selling perspective, you have to accept what the broker is bidding, that’s just it.
Keep in mind that the difference between the bid and the ask price is the spread, which is simply the broker’s commission on the trade process.
Spread and Pips
You might have heard of pips already, but just so you know; a pip is a unit of measure, which is the smallest unit of value in a forex currency quote. See this example below:
EUR/USD = 1.3600/1.3605
You look at the difference between the values above, and we have 5 pips, it’s just that easy. Again, the first number is the bid price, and the second value is the ask price. Simply put, the spread is the difference of 5 pips.