In Trading Currencies or in Forex Trading, you would have notice that each currency is displayed in a funny pattern, just like in the picture shown above and we will discuss what it means and how to read them.
For those of you who just stumbled upon this article from google or from any other means, and had no idea of how Forex work, I would suggest you first read this this post, Why Trade Forex before proceeding further.
In today’s lesson we will be talking about quotes and how to read them in regard to Forex Trading. You must have heard words such as pairs –that’s one of the terminologies associated with this multi trillion dollar industry, which we will be using to explain what quotes are.
What are Quotes?
Currencies are usually seen together in two’s (pair). Such as EURUSD, USDJPY, GBPUSD, USDZAR etc. This is because a currency need to be benchmarked against another currency in other for it to be traded, in any Exchange Floor.
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.
What Do Base And Quote Currency Mean?
There is no way you would trade forex without coming across those two words – base and counter currency. It is an essential knowledge that every Forex Traders should have.
Using the last example XYZUSD:
The first currency is denoted as the base currency because it is the currency being converted.
The counter or quote currency is the last currency because it is showing us the equivalent of the base currency.
Another 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.
Remember that when you see the pairs being quoted, you would see some figures right next to them. These figures are called BID and ASK price.
You cannot become a good forex trader without a proper understanding of how these things works (Bid and Ask).
What Is A Bid And A Ask Price?
Bid and Ask are the price at which people either buy or sell various currencies. Forex Trader uses them, bank and other financial institution also use them so it is very important.
Let’s briefly understand what these things mean
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 USDJPY 112.285/112.290. If you see another quote like this EURUSD 1.24564/79 it is the same as 1.24564/1.24579.
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 it is 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 articles.
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 or do comment below.