Forex Walkthrough

AAA

Level 1 Forex Intro - Reading A Quote

Most new investors in the forex market are usually confused with the way currency prices are quoted. In this section, we'll take a look at currency quotations and see how they work in currency pair trades.

Reading a Quote
When you look at a currency quote, you'll notice that all currencies are quoted in a pair – for example, USD/CAD or USD/JPY. The reason that currencies are quoted as a pair is because when you buy a currency you are selling a different one as well. A sample forex quote for the U.S. dollar (USD) and Japanese yen (JPY) would look like this:


USD/JPY = 119.50

This is the standard format for a currency pair. In this example, the currency to the left of the slash (USD) is referred to as the base currency, and the currency on the right (JPY) is called the quote or counter currency. This is important to remember. The base currency (in this case, the U.S. dollar) is always equal to one unit (in this case, US$1), and the quoted currency (in this case, the Japanese yen) is what that one base unit (USD) is equivalent to in the other currency (JPY).

This sample quote shows that if you wanted to buy US$1, you would have to pay 119.50 yen. Or if you wanted to sell US$1, you would receive 119.50 yen. If instead of USD/JPY, this quote read USD/CAD = 1.20, you would read it the exact same way. If you want to buy US$1, it will cost you C$1.20, and if you wanted to sell US$1, you would get C$1.20. These exchange rates simply tell you how much you will pay/receive if you buy/sell the "base" currency.

When you are buying the base currency (because maybe you think the base currency's value will go up) and selling the quote currency, you are entering into a long position. If you instead sell the base currency and buy the quote currency, you are going into a short position. So again, looking at the USD/JPY example, if you buy the USD, you're going long; if you sell the USD, you are going short.

Bid and Ask
Like buying a stock in the stock market, when trading currency pairs, the forex quote will have a bid price and an ask price. The bid and ask prices are always quoted in relation to the base currency.

When selling the base currency, the bid price is the price the dealer is willing to pay to buy the base currency from you. Simply put, it's the price you'll receive if you sell.

When buying the base currency, the ask price is the price at which the dealer is willing to sell you the base currency in exchange for the quote currency. Simply, when you want to buy a base currency, the ask price is the price you're going to pay.

A typical currency quote can be seen below. The number before the slash (1.2000) is the bid price, and the two digits after the slash (05) represent the ask price (1.2005) - only the last two digits of the full price are usually quoted. The bid price will always be lower than ask price. This is how the dealers make their money; they buy low and sell for a little bit higher. (For more, read Common Questions About Currency Trading.)


USD/CAD = 1.2000/05
Bid = 1.2000
Ask= 1.2005


If you wanted to buy the USD/CAD currency pair, you would be buying the base currency (U.S. dollars) in exchange for the quote currency (Canadian dollars). You need to look at the ask price to see how much (in Canadian dollars) the market is currently charging for U.S. dollars. According to this quote, you will have to pay C$1.2005 to buy US$1.

To sell this USD/CAD currency pair, or sell the USD in other words, you need to look at the bid price to see how much you are going to get. Looking at the bid price in this quote, it tells us you will receive C$1.2000 if you sell US$1.

More On Quotes
Related Articles
  1. Forex Education

    These Are The Best Hours To Trade the British Pound

    The best times to trade the British pound are centered around economic releases at 1:30 am, 2:00 am, 8:30 am and 10:00 am U.S. ET.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  5. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  6. Stock Analysis

    Investors Need to Stop Shorting GoPro. Here's Why

    Discover why investors should stop shorting GoPro. GoPro has been one of the fastest-growing companies since 2005 with many betting against more growth.
  7. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  9. Investing Basics

    5 Things to "Deliberately" Do to Improve Your Trading

    Most traders are putting in trading hours, but not improving. Here are deliberate steps that can take your trading to the next level.
  10. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
RELATED TERMS
  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Real Estate Investment Trust - ...

    A REIT is a type of security that invests in real estate through ...
  3. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  5. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  3. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  4. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!