To trade successfully on Foreign Exchange it is important that you are able to correctly read a Forex quote. Currencies are not traded individually. They are traded against in each other in pairs. This is why in each exchange quote that you come across you will see two currencies listed. The value in the quote expresses the exchange rate between the two listed currencies.
Interpreting an exchange rate quote allows you to identify when one currency is weak against another, or when a particular currency is showing strength. When viewing a quote you are able to see how a currency is performing against its peer. This is due to the various pieces of information that are contained within the quote.
Let’s look at a currency quote –
EUR/USD – 1.23829 / 1.23849
This is for what is known as the EUR/USD Forex pair.
The first thing we note is that two currencies are listed.. the EUR (Euro) and USD (United States Dollar). The Euro is listed first and so it known as the ‘Base Currency’. The US dollar is listed second and is known as the ‘Counter’.
Each currency pair in a quote is identified by a three digit code. This conforms to the ISO 4217 standard. The first two characters identify the country where the currency is issued. The third character identifies the currency by its name.
Example – The USD is US (United States) and D (Dollar).
The second part of the quote is the actual rage of exchange between the two quoted currencies. This displays how many units of base currency are needed to purchase a single unit of the quote currency.
Example – In the quote above , 1 dollar can be purchased for 1.23849 Euro’s.
When trading with a conventional broker, you will also notice that in each quote, two prices are given. These are known as the ‘ask’ and ‘bid’.
These two prices represent what the broker is prepared to buy and sell the currency pair for in the market.
The bid is the price the broker will buy at. This is the ‘sell’ price for the trader. In contracts the Ask price is the price at which the broker will sell a currency pair for. In the above the Ask is 1.24829 while the Bid is 1.23849.
The difference between these two quoted figures is known as the ‘Spread’. The spread is simply the difference between the buy and sell price and the way in which the broker makes a profit from executing each transaction. In Forex the spread is expressed in terms of the number of pips difference between the Ask and Bid price.
One most of the major currency pairs the spread is generally no more than 2-3 pips. This is because these pairs are more heavily traded and therefore the broker will find it easier to match up potential buyers and sellers in the market. On more exotic or less traded pairs, the level or spread will be much higher.
When trading with Forex Binaries the spread is inbuilt into the price of the contract in much the same way as in a regular quote. This is why when trading with Binary Options you may often notice small difference in the actual price that you purchase a contract at, and the market price you may be quoted on a third party chart.