- 1 Don’t be afraid of the term “quotations”: how to read Forex pairs
- 2 What is bid, ask, and spread
- 3 Now you know all the smart words
Don’t be afraid of the term “quotations”: how to read Forex pairs
To trade currency pairs, learning how to read their quotations is essential. This word is associated with the terms you need to comprehend first before you install the trading platform and open a trade:
● “bid” and “ask”;
● “pips” and “spread”.
You’ll come across these smart terms while trading. And, unless you grasp what this is now, you’ll get confused and make mistakes in your trades in the future.
So, let’s figure out the terminology. We are not gonna spend the life being afraid of smart words, are we?
Currency Pairs and Quotations
Forex is a place to trade currencies. Four of the most popular currencies are:
● USD — US dollar, $.
● EUR — Euro, €.
● GBP — Pound Sterling, or Pound, or British Pound (£).
● JPY — Japanese Yen (¥).
To know how much a currency is worth, it is compared to another one:
In the example above, Euro and US dollar were compared. Euro’s value is more than that of a dollar; 1 euro is worth $1,12.
Currencies are compared to find out which of them is worth more and which is worth less.
What is a Quotation
A currency pair quotation is its exchange rate:
“Exchange rate”, or just “rate” is the same as “quotation”.
How to Read Currency Quotations
For correct reading of quotations, we need to know how to calculate them. For this purpose, other currencies are compared to a dollar.
In a currency pair, a dollar may go first or second. Or sometimes a dollar is not present in a pair at all.
Reading of quotations will be different, depending on a case.
Is US dollar the first or the second currency in a pair?
Whenever a dollar is the first currency to appear in a pair, we call it the base currency and compare it with another one.
The dollar/yen exchange rate is 108.67. In this pair, dollar goes first, which means that the exchange rate shows how much yen is needed to buy 1 USD.
The quotation shall be read as: “1 USD is worth 108.67 yen”, or “108.67 yen are needed to buy 1 dollar”.
In the USD/CNY pair, dollar is the base currency, meaning that the rate shows how much of the second currency is needed to buy 1 USD.
In this example, we need to pay 7 Chinese yuan for 1 dollar.
How to read quotations when a dollar is a second currency in a pair
Whenever dollar goes second in a pair, it is referred as the quote currency.
With dollar being the quote currency, the exchange rate shows how much dollars another currency is worth.
The quotation shall be read as: “We need 1.11 USD to buy 1 Euro”.
In the GBP / USD pair, dollar is the quote currency. The quotation shall be read as: “With 1.29 USD we can buy 1 pound”.
How to read quotations when a dollar is not present in a pair
A quotation for a pair of currencies other than a dollar is known as cross rate.
To calculate a cross rate, currencies are first compared to a dollar, and then to one another.
A currency pair of EUR / GBP obviously contains no dollar. To calculate the rate, we shall compare the both currencies to a dollar first:
● The rate of EUR / USD is 1.1150.
● The rate of GBP / USD is 1.2930.
Then we shall proceed to comparing the rates of the currency pairs with one another.
● EUR / GBP = EUR / USD : GBP / USD
● EUR / GBP = 1.1150 : 1.2930.
The result is:
We now have the exchange rate of Euro to Pound:
Things to remember:
- A quotation is a currency pair exchange rate.
- To read a quotation, we need to compare a currency to US dollar.
- Whenever dollar goes first in a pair, it is a base currency, whenever it goes second, it is a quote currency.
- If dollar is not present in the currency pair, the currencies shall be each compared to dollar, producing two exchange rates. Those resulting rates shall be then compared with one another, producing the cross rate quotation.
The ways to say that quotations are changing
Quotations are not stable. They keep changing:
The Euro / US dollar rate is changing every second
We have learnt how to read quotations, but we don’t know yet how to tell someone how much the price has changed.
There are two terms for that: “tick” and “pip”.
Tick is normally the fourth decimal place. A tick is often referred to as a pip:
Pips changing in a Euro/USD pair
Wait a minute, but there are five decimal places.
The fifth decimal place is a tenth of a pip.
If a rate of pound to dollar has grown from 1.29310 to 1.29315, we say the price moved five tenth of a pip higher (it went half a pip up).
To avoid confusion, let’s consider two examples of Euro/US dollar.
Example 1 The rate of EUR / USD has moved from 1.1510 up to 1.1515. The fourth decimal place is a pip.
We say: “The rate of Euro / dollar went 5 pips up”.
Example 2 The rate of EUR / USD has dropped from 1.15225 to 1.15220. The fifth decimal place is a fractional pip.
We say: “The rate of Euro / dollar dropped by 5 fractional pips (by half a pip)”.
How to read quotations with 3 digits after a decimal point
Not all currency pairs have 4 decimal places. Thus, the currency pair of US Dollar / Yen features only three decimal numbers:
In the USD / Yen currency pair, however, one pip is the second decimal place, while the third decimal place is a fractional pip.
Seems like we’ve figured out the pips. Now we can tell someone by how much a rate of some particular currency pair has changed.
There are 3 quotation terms left, understanding which is essential before you even open a trading platform: bid, ask, and spread.
What is bid, ask, and spread
There are buyers and sellers of currencies.
Sellers sell at a more expensive price, while buyers buy at a cheaper price. A Seller’s price in a trading platform is always higher while that of a Buyer’s is lower:
The red line is for the Seller’s price, the black line is for the Buyer’s price
The red line at the picture above stands for the Seller’s price — ask. The black line shows bid, which is the Buyer’s price.
If you buy currency, the trade will be open at the Seller’s price (ask).
If you sell the currency, you’ll open the trade at the Buyer’s price (bid).
This is what bid and ask look like in a trading platform:
Bid and Ask for Euro / USD
There is always a certain difference, or spread, between the bid and the ask, because buyers and sellers do not concede on a price.
The difference between the two prices is known as spread:
Spread in a trading platform
For a trade to happen in the currency market, a trader kind of ‘fills in’ the spread with his/her trade.
When you open a trade, a spread is the commission you are going to pay.
Brokers’ proceeds come from spreads. We at AMarkets offer the lowest spread for currency trading: just two tenth of pip (0.2) at a pair of EUR / USD.
Now you know all the smart words
Congrats! You can now read quotations and know which commission you will pay for the trade. Go ahead and download the trading platform and start trading.
Currency pairs quotations are changing every second. If you manage to forecast the currency rate in 5 minutes, in an hour, or in a day, you will be able to make money.
With our educational articles your balance will start growing as early as 3-4 weeks after you begin trading:
1. How to earn on a pair of USD / Yen in 2020? The Complete Guide with the Check List and Detailed Description for beginners.
2. How to plan your day to avoid spending too much time for trading? How to realize when a strong trend is expected in a certain currency pair? An article about Forex Trading Sessions will answer your questions.