The Basics of Reading a Forex Quote
The foreign exchange market can be confusing for newcomers, and one of the sources of confusion is the forex quote. A forex quote is a small piece of information, yet it contains numbers that may not make sense to someone unfamiliar with the forex system. Here's a basic explanation of how it works.
A forex quote consists of a currency pair - forex deals always involve simultaneously selling one currency and buying another - a bid price, and an asking price. For example, one quote might be "USD/JPY 118.71/75."
The first currency is the base currency, and the second one is the quote currency. The value of the base currency is always 1 - in this case, 1 U.S. Dollar. The number tells you how much of the quoted currency (the Japanese yen, in this case) you can buy with $1.
But what kind of number is "118.71/75?" It's actually forex shorthand for two numbers: 118.71 and 118.75. The lower number is the bid price, while the higher number is the ask price. The bid price is the price that dealers will buy the base currency, while the asking price is what dealers will sell it for.
So if the above were the current quote, it would mean that right now, you could sell U.S. Dollars in exchange for 118.71 yen per dollar. Alternatively, you could buy U.S. Dollars at a rate of 118.75 yen per dollar.
The difference between the bid price and the asking price in a Forex quote is called the "spread," and the tiny units are called "pips." In our example, the spread for USD/JPY was four pips. The spread is usually that small for the most commonly traded currencies, which include the U.S. Dollar, Japanese yen, Great British pound, the euro, Swiss franc, or Australian dollar. In fact, thanks to the great competition in the forex trading market, some quotes will have a spread of as little as one pip.
Of course, for less commonly traded currencies, the spread can be much greater. And even when the quote delivers a small spread, it adds up when you're trading hundreds of thousands of units. If you were dealing with 100 U.S. The dollar, difference between selling them for 11,871 yen and buying them for 11,875 yen wouldn't be much - just four yen. However, if it was 100,000 U.S. Dollars, suddenly that four-pip spread means a 4,000-yen difference. Therefore, the spread in a quote is more important than its smallness would suggest.