Forex Guide

Quotation (forex quote) is the actual price or the bid or ask price of either cash commodities or futures or options contracts at a particular time. Quote is an indicative market price, normally used for information purposes only.

Currencies are quoted in pairs. The first listed currency is known as the base currency, while the second is called the counter or quote currency. In the wholesale market, currencies are quoted using five significant numbers, with the last placeholder called a point or a pip.

Like all financial products, forex quotes include a "bid" and "ask". By quoting both the bid and ask in real time, FXCM ensures that traders always receive a fair price on all transactions. As in any traded instrument, there is an immediate cost in establishing a position. For example, USD/JPY may bid at 131.40 and ask at 131.45; this five-pip spread defines the trader’s cost, which can be recovered with a favorable currency move in the market.

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01 Japanese yen.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 123.01, the dollar is stronger because it will now buy more yen than before. The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).

Direct and indirect quotes

On the Currency exchange market in every country, the local currency is quoted directly or indirectly against the American dollar and the other foreign currencies. The direct quoting is the amount of the local currency that is needed to buy one unit of the foreign currency and respectively the amount of local currency that is due to be received when one unit of foreign currency is being sold. In Japan, for example:

120.44- 120.52 USD/JPY

signifies that the dealers are buying one dollar for 120.44 yen, but are selling the very same unit for 120.52 yen.

Alternatively the indirect quote is the amount of the foreign currency needed to buy one unit of the local currency. The amount of foreign currency that is received if one local currency unit is sold to a dealer. This type of indirect quote is used for British pounds versus the US dollar, for example:
1.3600 – 1.3610 GBP/USD

This means, that you have to pay 1.3610 USD to buy 1 GBP and if you want to sell 1 GBP, you will receive 1.3600 USD for it.

Bid Price, Ask Price (Spread)

Like all traded instruments (stocks, bonds, futures etc.) there is a selling price (known as the “bid” price) and a buying price (the “ask” price). The difference between the two is called the “spread”.

The Spread - the cost a trader incurs when taking a position
GBP/USD 1.6545/1.6550 Sell Price/Buy Price

If you decide to long the currency pair (buy the base currency) because you think it will appreciate in value. You would enter the trade at the buy price, which means that if you wanted to immediately turn around and sell the same currency you just bought, you would have to sell it at the sell price, which is always lower than the buy price and you would lose the difference of that spread. In other words, the price of the currency you just bought would have to appreciate the value of the spread for you to break even.

The same thing applies if you want to sell the base currency, only you would enter the trade at the sell price which means that if you wanted to buy back what you just sold before the exchange rate had a chance to move, it would cost you the spread (in this case, 5 pips).

When you open a trade, the trading platform will show you the price you bought or sold the currency pair at. If, for example, you go long (buy) a currency pair, it will show the price you bought at, as well as the current sell price (the buy price minus the spread). In order to get into profit, the market will have to move at least the number of pips in the spread for you to break even. What this obviously means is that the tighter the spread, the better, because it means that the currency has a smaller value to rise before you’re into profit.

Standard Spreads

The good news is that, because we have the advantage of dealing directly with the market makers, most spreads in the currency market tend to be very tight (much tighter than any other financial market), not to mention, we also avoid round-turn commissions that traders in other markets pay to the brokerage houses on each and every trade.

The standard spread can vary from currency pair to currency pair. The more heavily a currency pair is traded, the less volatile it tends to be. Therefore, the most heavily traded currency pairs (the majors) tend to have the tightest spreads, whereas, the less traded, more volatile currency pairs (the crosses & exotics) tend to have wider spreads. The standard spread is 4-5 pips on the Majors and 5-20 pips on the Crosses & Exotics.

The closer the two prices are to each other, the “tighter” the spread, and the further they are from each other, the “wider” the spread.

In all cases, the bid (sell) price is always lower then the ask (buy) price.

In the forex market, the sell/buy price is usually expressed with sell price first in following way:
GBP/USD 1.6545/1.6550 Sell Price/Buy Price

However, the buy price is often abbreviated by only showing the last two decimal places as follows
GBP/USD 1.6545/50

The buy price is what has to be paid in the secondary currency to obtain one unit of the base currency. The sell price is what will be obtained in the secondary currency when selling one unit of the base currency. In this case, the spread is 5 pips.