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For most traders, one of the first things they will learn when learning the financial markets is to read Forex quotes. Like the language of markets, in order to be successful, Forex traders must be successful in trading quotes. Although it may seem difficult, the good news is that learning Forex trading quotes is interesting and does not require much mental effort.
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Before you can interpret the value of Forex trading quotes, you must first understand what the quotes are called. A trade text is represented by two currency symbols (or ISO codes) separated by a space, each currency symbol being three letters long. Usually the first two letters describe the name of the country and the last letter the name of the currency. For example, the US dollar is USD, the British pound is GBP, and the Japanese yen is JPY. While most major currencies are listed like this, there are exceptions among so-called “uncommon currencies,” such as the Argentine peso, which is ARS.
Key Principles To Understand When Trading Currency Pairs
The two codes form a currency pair. All amounts are quoted in pairs. The reason for this is because to show the value of something, you need to have something else to compare it to – or in our case, a quote against it. For example, EUR/USD is a currency band where the value of the euro is expressed in US dollars. The first currency in all Forex trading quotes – in this case the Euro – is known as the base currency, while the second is known as the counter currency, time currency or quote currency.
Most of the currencies you will deal with as a forex trader will be quoted against the US dollar, with a few rare exceptions (mostly in the range of unusual currency pairs). Among the major currency pairs, there are only two in which the US dollar exists
The currencies are: USD/JPY and USD/CHF. The first pair is easy to predict as it is the US dollar against the Japanese Yen. However, the second pair, which is the US dollar against the Swiss franc, is more complicated. This is because the CHF code refers to the old Roman Swiss name, “Confederatio Helvetia”.
The reasons for investing in Forex market quotes go back to the days when the British Empire was the dominant world power. Everything is then quoted against the pound sterling, including “queens’ money”. These were the currencies of nations with historical ties to Britain through their colonial origins, such as Australia and New Zealand. In the second half of the 20th century, the US dollar gradually replaced sterling as the dominant currency in the foreign exchange market.
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The combination of the US dollar and the following four popular world currencies (euro, pound sterling, Japanese yen and Swiss franc) dominates the Forex market. Currency pairs from these 5 currencies form a group called “Forex Major Currency Pairs”. They are read as follows: EUR/USD, GBP/USD, USD/JPY and USD/CHF. Currency pairs made up of major currencies that are not linked to the US dollar are called “cross pairs” and include: EUR / GBP, GBP / JPY, CHF / GBP, etc.
The following three currencies are most common in Forex: New Zealand Dollar, Canadian Dollar and Australian Dollar. When combined with the US Dollar, you have a group of pairs called “Forex Minors” which include: NZD/USD, CAD/USD and AUD/USD. All other currency pairs in Forex trading are often called odd pairs. They account for less than 15% of all foreign exchange transactions.
Sometimes novice traders may have trouble understanding Forex quotes when listening to experienced traders because some of the most popular currencies and currency pairs have nicknames. Apart from being used by traders as slang, these nicknames are useless for commercial purposes. However, to avoid confusion, we have listed these terms.
The GBP / USD pair is often called “cable” or “cable” and this reminds of the time when the communication cable under the Atlantic Ocean connected London and New York. The USD/JPY currency pair is sometimes called the “ninja”, while the EUR/GBP currency pair is known as the “channel”. You may also hear “greenback” for the US dollar, “swissy” for the Swiss franc, “loonie” for the Canadian dollar, “aussie” for the Australian dollar, and “kiwi” for the New Zealand dollar. As a forex trader, it is unlikely that you will have to deal with a lot of currency aliases and related pairs. In general, everyone agrees on one side of Forex live names to save unnecessary problems and confusion.
Forex Trading Quotes Explained
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What can worry you as a trader is the dynamics of the latest Forex quotes. This leads us right into studying the second value of money. It is the price that reflects the current dynamics of the currency pair and will always provide the basis on which trades should be made. To continue our example, we look at the price of 1.1234 / 1.1235 for the EUR / USD currency pair. Both figures show the value of the base currency – which is the euro – against the value of the counter currency – which is the US dollar.
The first number is called the bid price. It’s a confusing market for money. Or in other words, how much will you get in dollars if you sell one euro. The second number is the asking price. This shows how much in US dollars the market is asking for one euro if you decide to buy it. So the whole text reads: one euro is worth 1.1234 US dollars if you sell, or 1.1235 if you buy. Note, the bid price is always lower than the ask price. This price difference, which we will look at below, exists in all currency pairs and all financial markets.
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Forex Trade Journaling Do’s And Don’ts
There is a lot of information we can get from Forex trading quotes. For example, spreads can be an important piece of data for Forex traders. The spread is simply the difference between the purchase price and the selling price. It is measured in pips, marks or ticks – usually the fourth digit of the text after the mark. Let’s look at our working example of EUR/USD at 1.1234/1.1235. The difference between the bid and ask price here is 0.0001. This is like saying that the spread is one pipe.
For several years, pips were the smallest unit of price change in the market and were sometimes called ticks. Today, traders can quote currency pairs to five decimal places – the mean spread can vary by as little as ten pips. Smaller spreads are generally good for Forex traders, as less volatility in exchange rates makes it easier for trades to be profitable.
Most traders know that all changes in the Forex market involve buying or selling when the order is open – and, conversely, selling or buying when the order is closed. So, if you go long on EUR/USD, you first buy euros with dollars at the ask price. This will make the order open with a small downside to the equal value of the spread. Why is this happening? Because to close the order, you will facilitate an over the counter transaction and sell the Euros valued at USD at the bid price.
It is important to remember that all buy orders are opened at the ask price and then closed at the bid price of the trading instrument. Conversely, all sell orders are opened at the buy price and closed at the sell price of the instrument. This means that the spread is considered a trading cost – the wider the spread, the higher its value.
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It is worth remembering that although the price chart can show both the bid and ask lines of the second currency, the chart itself is drawn from the bid price.
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