How to read Forex quotes
Most investors start studying financial markets with familiarizing themselves to reading Forex quotes. In any market, price quotes are the language of it. No wonder that every trader wishes to be able to 'speak' this language fluently. You will notice that as you go deeper into your trader's career, every time you hear the word 'quote,' it will automatically make you think of the financial markets, not of the primary definition of citing the words of another person.
Do not get discouraged if this sounds frightening – in fact, reading Forex quotes can go pretty intuitive without much intellectual work.
Let's look at an example: EUR/USD 1.1234/1.1235.
We will use it to understand how to read Forex quotes. Let's start.
Names of quotes
In a quote, we see two currency symbols (or ISO codes) divided by a slash sign – in this example, they are EUR, which is the code for the EU euro currency, and USD, which is the code for the U.S. dollar. As a rule, currency code consists of three letters – the first two stand for the name of the country, and the last one defines the name of the currency itself. Thus, the Great British pound is GBP and the Japanese yen is JPY.
Two codes unite into a currency pair, and all currencies are quoted and traded in pairs. This is because to show a value of anything, something else is required to compare it to, or, as we say in financial markets, quote against. In our example, the EUR/USD currency pair, euro's relative value is indicated in US dollars. All Forex trading quotes list the base currency first – in this case it's the euro; the second currency in the quote is called either the counter currency, the quote currency, or the term currency.
We can assume that as a Forex trader, you will mostly deal with pairs where a currency is quoted against the US dollar. There might be a few exceptions, mostly of exotic currency pairs. The US dollar is the base currency for only two major currency pairs – USD/JPY and USD/CHF. The first pair is easy – this is the US dollar against the Japanese yen. The second pair, however, might seem a bit difficult at first for a beginner trader. The USD/CHF refers to the US dollar against the Swiss franc – the CHF code stands for the old Roman name of Switzerland, Condfederatio Helvetia.
The mechanism of how currencies are being placed in Forex market quotes dates back to the times of the Great British Empire's world domination. During those times all currencies were quoted against pound sterling. This also concerned the so-called Queen's currencies – those of the nations who used to be Britain's colonies ones and with which the historical ties remained, i.e. Australia, New Zealand, and other. The US dollar has taken its leading place in the Foreign exchange market relatively recently.
The group of major Forex currency pairs consists of combinations of the following most popular currencies of the world: the euro, the pound sterling, the US dollar, the Swiss franc and the Japanese yen. They are as follows: EUR/USD, GBP/USD, USD/JPY and USD/CHF.
Currency pairs that include major currencies quoted against each other but not including the US dollar are referred to as cross pairs: GBP/JPY, EUR/GBP, CHF/GBP, etc.
There is also a small group of currency pairs called Forex minors. They are the following popular currencies of the Forex market paired to the US dollar: the Canadian dollar, the Australian dollar, and the New Zealand dollar. Here are their pairs: CAD/USD, AUD/USD, and NZD/USD.
The rest of the Forex currency pairs are usually called exotic pairs. They comprise fewer than 15% of all foreign exchange transactions.
Another difficulty with understanding Forex quotes for rookie FX traders comes when communicating with experienced traders. The latter often use nicknames for some popular currencies and even for currency pairs that include them. You have to know that these nicks are simply slang names and not relevant for trading process. However, it's good to know them in order to feel more comfortable in the trading community.
The GBP/USD pair is sometimes called 'cable' or 'the cable.' This name goes back to the times when London and New York were connected with a communications cable laid under the Atlantic Ocean. EUR/GPB is occasionally referred to as 'chunnel,' and USD/JPY is jokingly called 'ninja.' If you hear 'greenback,' know that this means the US dollar currency, 'swissy' is a name for the Swiss franc, 'loonie' – for the Canadian dollar, 'aussie' for the Australian dollar, and 'kiwi' means the New Zealand dollar.
As soon as you become an expert Forex trader, you will probably not use the nicknames of the currencies and their pairs much. Live Forex quotes names are unilaterally accepted and used in order to avoid confusion and complications.
Value of quotes
What will be more important for you as a trader are the dynamics of Forex quotes. In practice this means being able to read the price of a currency pair. The price is an indicator of a pair's dynamics at the moment, and your trading decisions will be often made on the basis of the currency pair price.
Let's get back to our example of a currency price for EUR/USD at 1.1234/1.235. These numbers show us the value of the base currency, euro in this example, through the value of the counter currency, the US dollar in our case.
The first of the two figures is called the bid price – this is how much is offered for the currency on the market. Put simply, this is how much you will receive in dollars if you sell one euro. The second of the figures is called the ask price – as you may have got it, it's how much US dollars you would have to pay on the market for one euro if you decide to buy it.
To sum up, our given quote reads: one euro is valued at 1.1234 US dollars if you want to sell and 1.235 if you wish to buy. This is a rule for all currency pairs and all financial markets that the bid price is always lower than the ask price.
Below we suggest several more free Forex quotes that you may try to read:
Well done! You may see now that it's not that difficult.
The concept of spread
Forex live quotes actually provide us with more information, for example, the spread. The spread means the difference between the bid and the ask prices and can be a handy piece of data for Forex traders. The spread is measured in pips, ticks, or points – as a rule, it's the fourth digit after the dot in a quote. In our example of EUR/USD priced at 1.1234/1.1235 the difference between the bid price and the ask price is 0.0001, which means the spread is one pip.
In the past, pips, often called ticks, were considered the minimum unit of price change in the market. Today currency pair prices can be displayed to the fifth decimal place, meaning that spreads might equal to just a tenth of a pip. It is worth noting that smaller spreads are beneficial for Forex traders – insignificant fluctuations in exchange rates give traders more chances to earn with their trades.
Now moving to a trade mechanics, you might already know that every transaction on the FX market starts with buying or selling at the opening and ends with selling or buying at closing of an order.
So, if you want to go long on EUR/USD, you will start with buying euros for American dollars at the ask price.
When you do that, the order will open with an insignificant minus equal with the spread value. This happens because in order to close the order you will conduct a counter transaction and sell euros that will have increased in value for the US dollars at the bid price.
Make sure you comprehend and keep in mind that all buy orders open at the ask price and close at the bid price of the traded asset. To the contrary, sell orders open at the bid price and close at the ask price of the asset.
Also, remember that all charts are drawn by the bid price of an instrument, although both prices (bid and ask) might be reflected in a chart.
Because all investors are related to each other, Forex quotes reflect the best price available on the market at a given time. This is why Foreign exchange is so much loved by traders – it is the world's most liquid market.
Usually, any big quote discrepancy is momentarily negated with an automatic arbitrage, except for the periods of market turbulences.
For that matter, it is also true that one quote is only accurate for a short second. When the market is extremely volatile, the prices may change faster than real time Forex quotes.
For better understanding, price quotes are placed along each other as a price chart. Thus, any given chart offers you a more general view of the history of price quotes over a selected period of time.
In the past, Forex traders used to pay for receiving quotes. Fortunately, they no longer have to do that. Now all Forex quotes, as well as price charts and trading platforms are free of charge – this is secured by your broker as long as you use their services.
Hopefully, you now have better understanding of how to read Forex quotes, which takes you one step closer to becoming a professional trader.