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.

Currency Trading: 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 = 109.08

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.

Now that you understand the terminology we can tackle some of the more intricate details. Particularity, at this point, it is important to note that 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). For those getting started this can seem counter intuitive and it takes some time for it to become natural so don’t give up in frustration too easily. Let’s look at the example in more detail.

The sample quote shown above can be thought of as the amount of Japanese yen (109.08) that you would need to sell if you wanted to buy US$1. Conversely, if you wanted to sell US$1, you would receive 109.08 yen. If instead of USD/JPY, this quote read USD/CAD = 1.35, you would read it the exact same way. If you want to buy US$1, it will cost you C$1.35, and if you wanted to sell US$1, you would get C$1.35. 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.

Currency Trading: Understanding the 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 (1.3500) 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 = 1.3495/99
Bid = 1.3495
Ask= 1.3499

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$1.3499 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$1.3495 if you sell US$1.

More On Forex Quotes

Related Articles
  1. Trading

    Understanding The Spread in Retail Currency Exchange Rates

    Understanding how exchange rates are calculated and shopping around for the best rates may mitigate the effect of wide spreads in the retail forex market.
  2. Trading

    How Do You Make Money Trading Money?

    Making money in the foreign exchange market is a speculative process. You are betting that the value of one currency will increase relative to another.
  3. Trading

    What is an Indirect Quote?

    An indirect quote expresses the amount of foreign currency required to buy or sell one unit of the domestic currency in the foreign exchange markets.
  4. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  5. Trading

    What is a Direct Quote?

    A direct quote uses variable amounts of the home country’s currency to compare to a fixed amount of a foreign currency.
  6. Trading

    Top 5 Reasons To Invest In Currencies

    Here's why you should get into the forex market.
  7. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Every currency has specific features that affect its underlying value and price movements in the forex market.
  8. Trading

    4 Of The Most Popular Traded Currencies

    Every day, trillions of dollars trade in the forex market. Here are a few of the most popular currencies, and some characteristics for each.
Frequently Asked Questions
  1. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ...
  3. Which mutual funds made money in 2008?

    Read about the only mutual fund that turned a profit in 2008. Learn about risk-averse investment strategies and the financial ...
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center