You will need to understand how to properly read a currency pair quote before you start trading them. So, let’s get started with this:
The
exchange rate of two currencies is quoted in a pair, such as the EURUSD
or the USDJPY. The reason for this is because in any foreign exchange
transaction you are simultaneously buying one currency and selling
another. If you were to buy the EURUSD and the euro strengthened against
the dollar, you would then be in a profitable trade. Here’s an example
of a Forex quote for the euro vs. the U.S. dollar:
The
first currency in the pair that is located to the left of the slash
mark is called the base currency, and the second currency of the pair
that’s located to the right of the slash market is called the counter or
quote currency.
You will need to understand how to properly read a currency pair quote before you start trading them. So, let’s get started with this:
The
exchange rate of two currencies is quoted in a pair, such as the EURUSD
or the USDJPY. The reason for this is because in any foreign exchange
transaction you are simultaneously buying one currency and selling
another. If you were to buy the EURUSD and the euro strengthened against
the dollar, you would then be in a profitable trade. Here’s an example
of a Forex quote for the euro vs. the U.S. dollar:
If you buy the EUR/USD (or any other currency
pair), the exchange rate tells you how much you need to pay in terms of
the quote currency to buy one unit of the base currency. In other words,
in the example above, you have to pay 1.32105 U.S. dollars to buy 1
euro.
If you sell the EUR/USD (or any other currency pair), the
exchange rate tells you how much of the quote currency you receive for
selling one unit of the base currency. In other words, in the example
above, you will receive 1.32105 U.S. dollars if you sell 1 euro.
An
easy way to think about it is like this: the BASE currency is the BASIS
for the trade. So, if you buy the EURUSD you are buying euro’s (base
currency) and selling dollars (quote currency), if you sell the EURUSD
you are selling euro’s (base currency) and buying dollars (quote
currency). So, whether you buy or sell a currency pair, it is always
based upon the first currency in the pair; the base currency.
The basic point of Forex trading
is to buy a currency pair if you think its base currency will
appreciate (increase in value) relative to the quote currency. If you
think the base currency will depreciate (lose value) relative to the
quote currency you would sell the pair.
• Bid and Ask price
Bid Price –
The bid is the price at which the market (or your broker) will buy a
specific currency pair from you. Thus, at the bid price, a trader can
sell the base currency to their broker.
Ask Price –
The ask price is the price at which the market (or your broker) will
sell a specific currency pair to you. Thus, at the ask price you can buy
the base currency from your broker.
Bid/Ask Spread – The spread of a currency pair varies between brokers and it is the difference between the bid and ask the price.