Without the ability to read Forex quotes, traders cannot make trades on the Forex market, although there might be the occasional lucky guess situation. However, reading a quote is not as easy as one might think without some careful study and examination. Consider the following information regarding how to read Forex quotes efficiently and effectively.
Remember: A Forex quote is the comparison of a base currency against a counter currency so that the trader can profit ideally. The goal is to state the value of the counter currency compared to the value of the base, with the difference being the potential profit in that transaction. Currencies are listed side by side, sometimes with a / between them and sometimes with nothing to separate them. Each three-letter combination represents a different currency though, so regardless of the format the trader will know what currency pair is represented.
For instance, a common currency pair is USD/EUR, and in this quote the euro is the counter currency and the dollar is the base currency. The base—dollar—is the 1 in the quote price, and the euro is the currency compared. If the quote is posted as 1.0123 in this situation, 1 dollar is worth 1.0123 euros, and this may lead the trader to take appropriate action accordingly. When this indicates a high exchange rate the trader will sell to maximize profits, and when the exchange rate is low the trader will try to buy and turn a profit later (ideally).
Two Basic Quote Types
There are two types of quotes, indirect and direct quotes, with the difference being the position of the domestic currency in the quote. For direct quotes, the domestic currency is the first currency listed, such as the position of USD above. The domestic currency stays fixed at 1 while the foreign (second) currency is variable. For indirect quotes, the domestic currency is the second currency in the pair, or EUR above. The domestic currency is the variable in this situation and the foreign stays fixed at 1.
In many cases of spot quotes the base (domestic) currency is the American dollar, especially in direct quote situations. However, when the American dollar is paired against the currencies called the Queen’s currencies (NZD, GBP, and AUD) or the euro the American dollar is always the foreign currency in the quote. They are known as indirect quotes, and these are known as the domestic currencies when calculating the exchange rate.
Cross Currency Situations
Sometimes the American dollar is not involved in a transaction, and this type of situation is called a cross currency quote. For instance, if the euro and New Zealand dollar are being traded the quote would read EUR/NZD, but remember that cross currency quotes are a lot rarer than those transactions that incorporate the American dollar. The American dollar is the most widely traded currency in the world, and the vast majority of quotes will include it as the domestic or foreign currency.
Reading Bid and Ask Prices in the Quote
Finally, the amount of money that is being asked for a currency pair is the bid price of the quote, and the ask price is the amount of money that the pair can be sold for accordingly. Bid is always smaller than ask, and the difference between the two prices is the amount of profit that the trader can hope to achieve. Ideally, the bid and ask price will have a tremendous difference so that the trader can earn big profits as soon as possible, and this type of technique is referred to as scalping the market.