Welcome to the fourth article of our educational series. If you just stumble on this article from Google or any other search engine I would suggest you start from the part one of this article or simply glance though all our educational articles by clicking HERE.In the first part of our educational series, I talked a lot about what is forex, in the second part I discussed about why trade forex and the third part was on how money is made trading the forex market.
In today’s lesson we will be talking about how to read a forex quote. You must have heard words such as pair and quote. These are one of the terminologies associated with this multi trillion dollar industry.
Currencies are usually seen together in two’s (pair). Such as EURUSD, USDJPY, GBPUSD etc. this is because a currency need to be benchmarked against another currency in other to be traded.
Let’s take for example, you want to exchange between your country’s currency and the United State Dollar – since the United State Dollar is the widely traded currency in the world.
The exchange between these two currencies is what we refer to as pair. Let’s say your country’s currency is denoted as XYZ. It will be listed as XYXUSD –where XYZ is the base currency and USD is the counter or quote currency.
NOTE: that the first currency is denoted as the base currency because it is the currency being converted, while the counter or quote currency is the last currency because it is showing us the equivalent of the base currency. Example EURUSD: 1 EUR =1.36789 USD – remember that’s an example so the figures are bogus.
With this being said whenever we see a picture like the one below. We can identify the base currency and the quote currency.
The next you will need to understand is the BID and ASK price.
You cannot become a forex trader without a proper understanding of how these things works (bid and ask)
What is a bid and a ask price?
Bid is the market price at which your broker is willing to sell a currency to you.
Ask is the market price which you are willing to buy a currency from your broker.
I can smell it that you are confused that’s ok, I too was confused too the first time I heard about these terms. Let be break this down into fragments.
Let’s also play our assumption game by assuming you want to trade the pair USDJPY and you did your analysis and found that the USD is going long(bullish) and you want to buy that pair. The exchange rate or the quote which your broker is offering to you at that time was 112.285/90.
Can you guess the bid and ask price? 112.285 is the bid price while 112.290 is the ask price.
Now back to our discussion, you buy at the rate of 112.290 that is the ask price and you when you decide to sell you sell back to the market at the quote of 112.285. That explains why your open positions are always in red (loss) until price move in your favour.
And if you decide to sell, you sell at the rate of 112.285 and buy it back at 112.290.
The difference between the BID and the ASK price is called SPREAD. The spread is your broker’s share for doing business with you. Let’s simply say that’s your broker profit and you see they (your broker) make money when you trade continuously and you should not fall into their trap of over trading.
I believe I should add this so I won’t get you confused. Whenever you see a currency quote like this USDJPY 112.285/90 just know that it is the same as EURUSD 112.285/112.290. If you see another quote like this 1.24564/79 it is the same as 1.24564/1.24564.
You may be asking why it is written that way. I can’t say, maybe they believe that most people who trade this market are born professional in trading or a better way to save them the stress of writing everything in full.
You may have noticed that there are two different digits for both the USDJPY and EURUSD– I will explain more about this in my later lessons.
I still have this funny feeling in my stomach that 70% of people who read this article might still be confused but you have nothing to worry about. I also felt the same way when I was reading about this topic few years ago but you got no worry as I am here to answer your questions. Please feel free to contact me if you ever need any further explanation.
Also do comment below.