The world of the foreign exchange is fast-paced, volatile, and complex, and many people find the jargon and stratagems that underlie the trading game incredibly hard to understand.
In truth, although it’s easy to lose your head, unravelling quotes and rates isn’t as hard as it first appears. Currency quotations are presented in a way that can be deciphered at a glance, in order to help traders calculate whether or not a particular move would be advantageous to their strategy.
To help you out, here is a brief guide to reading and analysing forex quotes…
How to Read a Quote
On the forex markets, currencies are always quoted in relation to each other. Although there will only be a single figure provided, every quote thus has two components, with the value of one reflected through the value of the other.
If we imagine, for a moment, that we wish to determine the exchange rate between the USD dollar (USD) and the pound (GBP), our quote would appear like this:
USD/GBP = 1.1800
The currency on the left is referred to as the base currency, and it always equals one unit – in this case, $1.
The currency on the right is the quote or counter currency. It demonstrates the equivalent value of the opposing currency. So, if we exchanged $1 on the forex markets for its equivalent value in pounds, we would receive £1.18.
Bid and Ask Prices
The financial markets work by trading currencies against each other, with the aim being to amass more money at the end of trading than you had at the beginning.
As a result, you need to understand bid prices (buying) and ask prices (selling).
When you buy a currency, also known as going long, you’ll pay the ask price i.e. the amount of quoted currency required to buy one unit of the base currency.
When you sell a currency, on the other hand, which is known as going short, you’ll see the bid price: how much you will receive for selling one unit of the base currency.
These quotes will be presented like so: USD/GBP = 1.1800/05
The bid price would be 1.1800, whilst the ask price would be 1.1805. The quote before the slash is the bid price, and will always be lower than its ask price equivalent.
Thus, the aim, quite simply, is this: to make more through selling than you will pay to buy your currencies. And, with markets that are ever changing and volatile, and prices that never remain static, opportunities to do so abound.
Could forex help to turn your fortunes around?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.