Understanding and Reading Forex Quotes
For most traders, the very first thing that they will learn about when studying the financial markets is reading Forex quotes. Price quotes are the language of the markets, so it's of no surprise that it's a language that every trader is, or aspires to be fluent in. Although it can look quite daunting, the good news is that reading Forex quotes is pretty intuitive, and doesn't require too much mental effort.
First of all we have two currency symbols (or ISO codes) separated by a slash. EUR, which is the currency code for the European Union euro - and USD, which is the code for the United States dollar. Usually, codes are comprised of the two first letters defining the name of the country, and the last letter for the name of the currency. Therefore, the United States Dollar is: USD, the Great British Pound is: GBP, and the Japanese Yen is: JPY.
Two codes make a currency pair. All currencies are quoted in pairs. The reason for this is simply because in order to express a value of anything, you need something else to compare it to - or in our case, to quote against. Continuing with this example, EUR/USD is a currency pair wherein the relative value of the euro is expressed in US dollars. The first currency in all Forex trading quotes - in this case the euro - is known as the base currency, while the second one is known as either the counter currency, the term currency, or the quote currency.
Most currencies you will deal with as a spot Forex market trader will be quoted against the US dollar, with a few rare exceptions (mostly from a list of exotic currency pairs). Among the major currency pairs, the only two with the US dollar being the base currency are: USD/JPY and USD/CHF. The first pair is easy to read, as it's simply the US dollar against the Japanese yen. However, the second pair, which is the US dollar against the Swiss franc, is more difficult to interpret. This is because the CHF code references the old Roman name of Switzerland, which is known as 'Confederatio Helvetia'.
The reasons behind currency placements on Forex market quotes takes us back to the days when the Great British Empire was the dominating world power. Back then, everything was quoted against the pound sterling, including the 'Queen's currencies'. Those were the currencies of nations that had historical ties to Britain through their colonial origin, such as Australia, New Zealand, and a few others. Only in recent history has the US dollar become the significant player within the Forex market.
Combinations of the five most popular world currencies include: the US dollar, the euro, the pound sterling, the Japanese yen, and the Swiss franc. These pairs make up a group currency pairs referred to as 'Forex major currency pairs'. They read as follows: EUR/USD, GBP/USD, USD/JPY, and USD/CHF. Currency pairs comprised of major currencies that do not pair with the US dollar are referred to as 'cross pairs', and they include: EUR/GBP, GBP/JPY, CHF/GBP, and so on.
The following three more currencies are quite common in Forex, they include: the New Zealand dollar, the Canadian dollar, and the Australian dollar. When you pair them to the US dollar, you have a group of pairs known as 'Forex minors' which include: NZD/USD, CAD/USD and AUD/USD. All other currency pairs in Forex trading are generally referred to as exotic pairs. They account for less than 15% of all foreign exchange transactions.
Sometimes beginner traders may have trouble understanding Forex quotes when listening to experienced traders, because some more popular currencies have nicknames, and by extension, so do the currency pairs that include them. Other than being used by traders as slang, these nicknames are irrelevant for trading. However, to prevent confusion we have listed these terms for you.
The GBP/USD pair is often referred to as 'cable' or 'the cable', and this is reminiscent of the times when a communications cable under the Atlantic Ocean connected London and New York. The USD/JPY currency pair is occasionally called 'ninja', while the EUR/GBP currency pair is known as 'chunnel'. You may also hear 'greenback' used for the US dollar, 'swissy' for the Swiss franc, 'loonie' for the Canadian dollar, 'aussie' for the Australian dollar and 'kiwi' for the New Zealand dollar. As a professional Forex trader, you're not likely to bother much with the nicknames of currencies and their respective pairs. Everybody typically agrees on the unilaterality of live Forex quotes names, to save unnecessary complications and confusion.
What you might be bothered with as a trader are the dynamics of Forex quotes. This conveniently brings us to reading the price of a currency pair. The price is the very thing that indicates the current dynamic of a currency pair, and it will often provide the basis for whether a trade should be made. To follow on with our example, we're looking at a currency price of 1.1234/1.1235 for the EUR/USD currency pair. Both of these numbers express the value of the base currency - which is the euro - through the value of the counter currency - which is the US dollar.
The first number is called the bid price. This is simply how much the market bids for the currency. Or in other words, how much you will get in dollars if you sell one euro. The second number is the ask price. This indicates how much in US dollars the market is asking for a single euro, should you choose to buy it. So the whole quote says: one euro is worth 1.1234 US dollars if you are selling, or 1.1235 if you are buying. Note, the bid price is always smaller than the ask price. This applies to all currency pairs and all financial markets.
Here are a few more free Forex quotes for you to try and interpret:
- CHF/JPY 122.34/122.56
- AUD/NZD 1.0101/1.0102
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There's more information we can draw from Forex live quotes. For instance, the spread can be a useful piece of data for Forex traders. The spread is simply the difference between the bid price and the ask price. It is measured in pips, points, or ticks - which is typically the fourth digit of a quote after a dot. Let's consider our running example of EUR/USD priced at 1.1234/1.1235. The difference between the bid and ask price here is 0.0001. This is the equivalent of saying that the spread is one pip.
For a number of years, pips were the minimum price change unit of the market, and were often referred to as ticks. Today, brokers can provide currency pair prices to the fifth decimal place - which means that spreads can fluctuate by even just a tenth of a pip. Smaller spreads are generally good for Forex traders, as smaller fluctuations in exchange rates make it easier for trades to become profitable.
Most traders know that every transition in the Forex market involves buying or selling at the opening of an order - and, reversely, selling or buying at closing. Thus, if you are going long on EUR/USD, you are first buying euros for dollars at the ask price. Doing this will make the order open with a slight minus at the equivalent value of the spread. Why does this happen? Because to close the order, you will facilitate a counter transaction, and sell the appreciated euros for the US dollars at the bid price.
It is important to remember that all buy orders open at the ask price, and subsequently close at the bid price of a traded instrument. Conversely, all sell orders open at the bid price, and close at the ask price of the instrument. It's worth keeping in mind that although a price chart may be reflecting both bid and ask lines for a currency pair, the chart itself is drawn by the bid price.
Thanks to the interconnectivity of all traders, Forex quotes represent the best price available on the market at any given time. That's why Forex is a popular choice for investors - it's the most liquid market in the world. Except for times of major market turbulence, any significant differences in quotes are momentarily negated through an automatic arbitrage.
By extension, this also means that any one quote is only valid for a brief second. At times of great market turmoil, price on the market may change faster than real time Forex quotes. In order to have a better understanding of price quotes, they are placed in context of each other in the form of a price chart. This chart is nothing but a helicopter view over the price quote history during a selected time interval.
Years ago, Forex traders would have to pay to receive quotes. Thankfully, this is not the case today. Your Forex quotes are free of charge, as are your price charts, your trading platform, and your access to the market. Your broker makes sure of that, as long as you are using their services. Now that you know how to read Forex quotes, you are one step closer to becoming a real life professional trader.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.