Forex Quote
Being able to read and really understand a Forex quote is, unsurprisingly, key to trading Forex . Let us start with an example of an exchange rate:
EUR/USD 1.12540
The currency on the left (EUR) is the Base currency and is always equal to one unit — 1€, in this example.
The currency on the right (USD) is called the Counter or Quote currency.
The number is what the counter currency is worth relative to one unit of the base currency. When that number goes up, it means the base currency has risen in value, because one unit can buy more of the counter currency. When that number goes down, the base currency has fallen. In this example quote;
1€ = $1.12540
You are always buying or selling the base currency. Within a pair, one currency will always be the base and one will always be the counter — so, when traded with the USD, the EUR is always the base currency. When you want to buy EUR and sell USD, you would buy the EUR/USD pair. When you want to buy USD and sell EUR, you would sell the EUR/USD pair.
Forex Rates
As with stock trading, the BID and ASK prices are key to a currency quote. They, too, are tied to the base currency, and they get a bit confusing because they represent the dealer’s position, not yours.
The bid price is the price at which you can sell the base currency — in other words, the price the dealer will “bid,” or pay, for it. The ask price is the price at which you can buy the base currency — the price at which the dealer will sell it, or “ask” for it.
The ASK price tells you how much of the counter currency (USD, in our example) it will take to buy one unit of the base currency (EUR).
The BID price tells you how much of the counter currency you can buy when you sell one unit of the base currency.
The difference between these two prices — the ask price minus the bid price — is called the spread.
The BID and ASK are typically shown as EUR/USD bid/ask, and the ask is represented with only the last two digits. For example, EUR/USD 1.12540/46 means that the bid is 1.12540 and the ask is 1.12547. You could sell 1€ for $1.12540 (the bid) and buy 1€ for $1.12547 (the ask).
The BID price is always lower than the ASK price, and the tighter the difference between BID and ASK, named spread, the better for the investor. Many brokers mark up or widen, the spread by raising the ask price. They then pocket the extra rather than charging a set trade commission.
The last salient point about pricing is that the spread, earnings, and losses are measured in a unit called a PIP.
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