Forex Walkthrough

AAA

Level 1 Forex Intro - More On Quotes

Spreads and Pips
The difference between the bid price and the ask price in a forex quote is normally called the spread. In the previous example: USD/CAD = 1.2000/05, the spread is 0.0005, or 5 pips. Pips, or points, is the common name used to refer to incremental changes in a forex quote – a change from 1.2000 to 1.2001 would equal one pip. Although these currency movements may seem small, due to leverage used in the forex market, small changes can result in large profits or losses. (Learn how brokerages make some of their profits in How is spread calculated when trading in the forex market?)

With the major currency pairs such as the EUR/USD, USD/CAD, GBP/USD, one pip would be equal to 0.0001. However, if you take a look at a USD/JPY quote you'll notice the pair only goes to two decimal places, so one pip would be 0.01. So, in general, a pip represents the last decimal place in the quote.


Currency Quote Overview
USD/CAD = 1.2000/05
Base Currency
Currency to the left (USD)

Quote/Counter Currency
Currency to the right (CAD)

Bid Price
1.2000
Price for which the market maker will buy the base currency. Bid is always smaller than ask.
Ask Price
1.2005
Price for which the market maker will sell the base currency.
Pip
One point move, in USD/CAD it is .0001 and 1 point change would be from 1.2000 to 1.2001
The pip/point is the smallest movement a price can make.
Spread
Spread in this case is 5 pips/points, or the difference between bid and ask price (1.2005-1.2000).


Lots
Similar to how most stocks trade in lots to facilitate trading, currencies are also traded in lots – $100,000 is typically the standard lot. There are also smaller lots with a size of $10,000 called mini-lots. These may seem like large amounts but because currencies only move in small increments, only a few pips at a time, a larger amount of currency is needed to generate any sizable profits or losses. (For more on mini lots, see Forex Minis Shrink Risk Exposure.)
Direct Currency Quote vs. Indirect Currency Quote
You can quote a currency pair in two ways, either directly or indirectly. A direct currency quote is simply a foreign exchange quote where the foreign currency is the base currency; an indirect quote is a currency pair in which the domestic currency is the base currency. For example, if you're in Canada and the Canadian dollar is the domestic currency, a direct quotation would take the form of a variable amount of the domestic currency for a fixed amount of the foreign currency. A Canadian bank giving a quote of "C$1.20 per US$1" would be a direct quote. Conversely, an indirect quote fixes the domestic currency and varies the foreign currency. In the same example, if the Canadian bank gave a quote of "C$1=US$0.83" it would be an indirect quote.

Cross Currency
A currency quote given without the U.S. dollar as part of the currency pair is called a cross currency quote. Common cross currency pairs include the EUR/CHF, EUR/GBP and EUR/JPY. Although having cross currencies increases the amount of choice for the investor in the forex market, cross currencies are not as popular as ones that have the U.S. dollar as a component of the currency pair. (For more on cross currency, see Make The Currency Cross Your Boss)

Now that you know more about reading and interpreting a forex quote, in the next section we'll look briefly at the economics and fundamentals behind forex trades and what economic indicators a new trader should become familiar with and be able to interpret.


Economics


Related Articles
  1. Forex Education

    Forex Tutorial: Reading a Forex Quote and Understanding the Jargon

    One of the biggest sources of confusion for those new to the currency market is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in ...
  2. Forex Education

    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.
  3. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  4. Forex Education

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  5. Forex Education

    Forex Tutorial: Currency Trading Summary

    While this online forex tutorial only represents a fraction of all there is to know about forex trading, we hope that you've gained some insight into this topic. We also encourage those of you ...
  6. Forex Education

    Forex Minis Shrink Risk Exposure

    Trading less than a standard lot means getting in for less - and having less to lose.
  7. Forex Education

    Forex Currencies: Conclusion

    By Brian Perry Conclusion The currency markets are the largest and most actively traded financial markets in the world with daily trading volume of more than $3 trillion (Triennial Central ...
  8. Options & Futures

    Understanding Forex Quotes

    When trading in forex, all currencies are quoted in pairs. Find out how to read these pairs and what it means when you buy and sell them.
  9. Forex Fundamentals

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  10. Stock Analysis

    The Ultimate Guide To Currency ETF Trading

    Want a simpler way to invest in the forex market? Currency ETFs give you just that!
RELATED TERMS
  1. Quote Currency

    The second currency quoted in a currency pair in forex. In a ...
  2. Base Currency

    The first currency quoted in a currency pair on forex. It is ...
  3. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  4. Dollar Rate

    The exchange rate of a currency against the U.S. dollar (USD). ...
  5. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  6. Indirect Quote

    A currency quotation in the foreign exchange markets that expresses ...
RELATED FAQS
  1. Why is currency always quoted in pairs?

    When reading currency quotes, you have probably noticed that there is only a single quote for a pair of currencies. Currency ... Read Answer >>
  2. How do you make money trading money?

    Investors can trade almost any currency in the world. Investors, as individuals, countries, and corporations, may trade in ... Read Answer >>
  3. How is the value of a pip determined?

    Learn how the pip is used in the pricing of a currency pair in forex trading, and see how the foreign exchange market is ... Read Answer >>
  4. How can I trade in cross currency pairs if my forex account is denominated in U.S. ...

    The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is ... Read Answer >>
  5. What is a pip and what does it represent?

    A pip is a very small measure of change in a currency pair in the forex market. It can be measured in terms of the quote ... Read Answer >>
  6. What are the most common currency pairs traded in the forex market?

    There are many official currencies that are used all over the world, but there only a handful of currencies that are traded ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center