A Brief Guide to Trading the EUR/USD – Chapter 4: Forex Quotes

This is chapter number 4 out of 7. Read the rest:

Read A Brief Guide to Trading the EUR/USD – Chapter 1: An introduction to Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 2: The EUR/USD currency pair
Read A Brief Guide to Trading the EUR/USD – Chapter 3: Reasons for trading in Forex

As mentioned previously, all Forex exchange rates are quoted in terms of currency pairs. Although it might look confusing initially, it is relatively easy to understand. Each currency pair is denoted in the format XXX/YYY as specified by ISO 4217 international three-letter code of the currency . XXX is the “Base Currency” and YYY is the price of one unit of XXX currency.

For example with regards to the pairs EUR/USD; GBP/AUD and USD/JPY, the base currency in those pairs are Euro, British Pound and US dollars respectively. The base currency will always have a numerical value of 1. Thus, GBP/AUD will indicate many units of Australian dollar is required to purchase 1 unit of British pound.

Ask / Bid & Spread:

Bid Price:

This is the rate which the market is willing to purchase the currency pair at. You will also be disposing the “base currency” at this rate. The bid price is displayed on the left of the quotation. For example for the rate of EUR/USD 1.4550/ 55, this denotes that the bid price is 1.4550. Therefore you will sell the Euro at 1.4550 US dollars.

Ask Price:

This is the reverse of the bid price. The market will be willing to sell you the currency pair at this “Ask” price. In short, you will be buying the base currency at this rate. This is the price which is shown on the right of the quotation. In our example of the EUR/USD 1.4550/55, the Ask price is 1.4555. Therefore, you will be buying Euro at 1.4555 US dollars. Also remember that the Ask price is sometimes referred to as the Offer price. 

Spread:

There is no commission payable in Forex trading. Instead, there is “Spread” payable. The “Spread” is the difference the “Bid price” and “Ask price”. In short, this is the “spread” between what the market sells and buys from a trader. As opposed to commission charges in the stock market, you will only pay this “spread” when you buy. You will not have to pay this “spread” when selling the related currency pair. In short, the spread is a round turn cost. In our example, the spread is 5 pips with the EUR/USD rate at 1.4550/55.

The Pip:

The pip is the smallest denomination of the Forex rate. Usually, currencies pairs are traded at fraction of one cent or one euro or one yen. Almost all currency pairs are denoted in terms of 5 numbers with a decimal after the first number. For example, EUR/USD = 1.4550. Therefore, the pip is the smallest change at the 4th decimal place, like 0.0001. Thus if the quote is in USD, then one pip is equal to 1/100 cent. A particular exception is the USD/JPY pair which is denoted up to 2 decimal points. Here, one pip is equal to $0.01.

Read A Brief Guide to Trading the EUR/USD – Chapter 5: Fundamental Analysis for Trading EUR/USD
Read A Brief Guide to Trading the EUR/USD – Chapter 6: Technical Analysis for Trading Forex
Read A Brief Guide to Trading the EUR/USD – Chapter 7: Conclusion