How to Read a Forex Quote
Understanding forex quotations is the most fundamental aspect of trading forex.
All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
Jumping into forex trading after COVID-19?
You’re not alone. The volatility caused by recent economic disruptions has created opportunities in the forex market.
Further, trading forex is something you can do from home—in a time where going out isn’t as normal as it should be. People are entering the market now more than ever, with forex trading seeing a 300% increase in 2020. 📈
It’s not always easy to get started though, with so many graphs, terms, and numbers to decipher. Pips? Currency pairs? Bid and ask? These seem confusing and scary to all beginners—especially when your money is involved.
While terms like forex quotes aren’t difficult to understand, they are essential. Without knowing how to read them, trading forex will be difficult to say the least, though catastrophic could be a better word.
Fortunately, these terms aren’t very complicated once you get through the basics. Just a bit of know-how, and forex trading becomes less mysterious and more profitable.
In this article, we will discuss what exactly forex quotes are and how to read them, as well as explain all the elements that make up the price of a forex pair. Don’t worry, as perplexing as it may sound, this will only take about 5 minutes—so let’s get to it.
- What are Currency Pairs?
- Forex Quotations Explained
- What Do 'Bid' and 'Ask' Mean?
- Direct vs. Indirect Forex Quotes
- Calculate Cross-Currency Rates
- Can Exchange Rates Vary?
- Pips Explained
- How Do Spreads Work?
What are Currency Pairs? 💱
When it comes to forex, currency pairs are as inseparable as Jay Z and Beyoncé. That’s because there is always a currency pair involved in forex trades.
Indeed, when learning to trade forex, currency pairs are the first thing to know. Generally, they tell you how much of a foreign currency you can get for your domestic currency.
Of course, it’s a little broader than that for forex traders. Still, every time you trade forex, you’ll be dealing with currency pairs.
After all, you wouldn’t trade 1 Euro for 1 Euro. Well, I suppose you could try, but to actually make money in forex is through, you need to exchange different currencies, a.k.a. forex pairs. Since you need these pairs to make a buck, here’s how they work.
When reading a forex quote, the first currency is called the base, and the second is called the quote or counter currency. Essentially, if the forex pair costs 1.2, that means you need to sell 1.2 of the quote currency to get 1 of the base currency. Let’s view this through an example.
If you have US dollars and want to buy Euros, the price for that currency pair will tell you how much you have to pay. For example, one Euro costs 1.20 US dollars. To clarify, if the EUR/USD pair costs 1.20, that means that you can buy one EUR for 1.20 USD.
There are three types of currency pairs in the forex market: major, minor, and exotic. As you can probably guess by the name, major pairs, like NZD/USD are traded the most often and usually have the USD plus another major world currency in them. Since these currencies are tied to specific economies—in specific timezones—the ideal time to trade forex largely depends on the currencies in question.
On the other hand, minor pairs are traded less often, and exotic pairs are the rarest, and usually the least stable. Major pairs are more popular because the countries that use them are the big economies of the world.
Therefore, the value of these currencies is supported by robust, well-functioning economies, making their price more stable and durable in times of crisis.
Opposite to majors, exotic pairs can be very volatile. Since these currencies come from less developed economies, their price is more susceptible to current events—like how Brexit impacted exotic currencies much more than it did the GBP or EUR.
If you plan to go on an African safari, you’ll probably be dealing with exotic pairs—and that can yield greater profits than trading Majors. However, it also comes with more risk, so pick your target.
All in all, major currencies are stable and have the smallest price movements, even when the market is in turmoil, while exotic pair prices can move all over the place, and minors are somewhere in between.
Types of Forex Pairs 📜
Forex Quotations Explained 👩🏫
You may not find forex quotes as interesting as inspirational quotes, but they are important nevertheless. Forex quotes tell you how much the prices to buy and sell a given currency, which means they tell you if you can make money from a trade, and how much.
What Do ‘Bid’ and ‘Ask’ Mean? 🤔
As we saw above, each forex quote has two currencies with a bid and ask price. These are the prices at which brokers are willing to buy and sell currencies.
⚡️ Note: These prices are from the perspective of your forex brokerage. The bid price is how much the broker is willing to pay for a currency, and the ask price is how much they are willing to sell it for.
For example, say you have 1,000 Euros and want to buy US dollars. If the EUR/USD price is 1.2012, you would receive 1,201 USD.
In this example, 1.2012 is the bid price, because that is how much the broker is willing to pay. Naturally, since the broker is paying, the price at which they’re buying is the lower price.
Then, you might then see an ask price of 1.2017, which is the higher price. That is very close to the bid price, which is normal for a major pair. In any case, the ask price is how much the broker would sell the currency for.
When the whole thing is written out, you might see:
EUR/USD = 1.2012/1.2017 — (Base/Quote = Bid/Ask)
This reflects both the bid and the ask price. The ask price will always be higher than the bid price as that is how brokers make money. You can sell your currency low, and buy it high—that’s why the bank always wins unless you trade smart. Then you win.
Let’s make it interactive! QUIZ:
Say you have 1,000 USD and want to buy as many EUR as you can with your money. The ask price for EUR/USD is 1.23. How many EUR can you buy?
If you said 813.01 EUR, you are correct! Since 1 Euro buys 1.23 USD, we divide $1,000 by 1.23 to get 813.01. Easy as pie.
Direct vs. Indirect Forex Quotations 🌍
Direct and indirect forex quotes are simply a way to refer to forex quotes based on where the buyer or seller lives.
A direct quote is a fixed amount of domestic currency against a variable amount of foreign currency. On the other hand, an indirect quote is a fixed amount of foreign currency against a variable amount of domestic currency.
For example, if you are a European forex broker and you buy USD, you pay the EUR/USD rate. Let’s say it is 1.2012, as mentioned above. For you, this would be a direct quote; 1 EUR buys 1.2012 USD.
However, the above is an indirect quote for an American traveling to Europe who has to buy EUR. In that case, the American would pay the inverse of the above, which is 0.83 EUR per USD—and indirect quote.
How to Calculate Cross-Currency Rates ➗
USD is the big dog in town, and most major pairs include it. Therefore, a cross-currency is a currency pair that does not include the US dollar.
To calculate cross-currency rates, you essentially sell one currency for USD and then use USD to buy another currency. It’s a bit confusing, but hold on, it’ll make more sense in a bit.
Let’s say you want to calculate EUR/CAD. Note that we actually have two currency pairs involved in this calculation—EUR/USD and USD/CAD. In the first pair, USD is the quote currency; it’s the base currency in the second pair.
Because of this, we can find EUR/CAD by simply multiplying the two pairs above. Let’s say our two bid prices are:
EUR/USD = 1.22
USD/CAD = 1.28
Then, to find EUR/CAD, the conversion is:
EUR/CAD = 1.22 * 1.28 = 1.56
What if USD is the Base or Quote in Both Pairs? 💵
Are you lost yet? Hopefully not, because things get a little more complicated if USD is the base or quote in both pairs. But don’t worry—it’s not too bad.
Take EUR/AUD for example. Here, our two pairs are EUR/USD and AUD/USD.
USD is the quote currency in both pairs, so we must flip one of the pairs to find the cross-currency rate. Here are the bid prices for each pair:
EUR/USD = 1.22
AUD/USD = 0.76
Still with me? Great! So, we’ll flip AUD/USD to find this pair.
To do so, we divide 1 by the AUD/USD bid. Then, the rest of the calculation is the same as the one earlier:
EUR/AUD = 1.22 * (1/0.76) = 1.61
That wasn’t so bad, was it? Believe it or not, once you calculate the price of a cross-pair like this it sticks to your memory and you don’t have to think about it anymore. Just like riding a bike that’s made of abstract financial concepts—it never goes away.
Exchange Rates Can Vary by Dealer ⚠️
Different dealers have different exchange rates. There are a few reasons for this. For example, tourists landing at CDG in Paris will have to pay highly unfavorable rates to a broker at the airport.
That’s because you just have to pick up that fancy French handbag before you even leave the airport! Of course, the brokers know this, which is why airport exchanges will rip you off more than any other exchange would.
Another factor that can influence prices is fixed vs. variable spreads. The spread is the difference between the bid and ask price, and some dealers use the same spread for each currency pair regardless of market conditions. This is known as a fixed spread.
On the other hand, some dealers use a variable spread, which can change depending on market conditions. Unsurprisingly, variable spreads can be more expensive for traders during times of economic uncertainty.
Since every broker can have different rates, fees, and even available currency pairs, you might want to find a good forex broker for you before you start trading. Otherwise, you’re in for a surprise once you realize that you would’ve made a lot more money if you only switched to a cheaper broker earlier on.
What are Pips? 💡
You might think pip sounds like a funny word, but it’s actually an abbreviation: percentage in point. Quite literally, it’s the percentage change in price at a given point in time. Pretty simple, actually.
Take our 1.2012 EUR/USD price above. If that price increases to 1.2018, you would say the price increased 6 pips.
In some places, you may only see two decimal places, such as on Google’s built-in currency converter. However, you should only use this tool for basic reference—precise currency pair prices have 4 decimal points and one pip is equal to 0.0001, so you need these decimal points to see by how many pips a currency has gone up or down.
On the other hand, there are some currency pairs where the standard is just two decimal places. The most common one is USD/JPY, where you might see prices such as USD/JPY = 103.53.
Typically it’s just the last decimal place that is expressed in pips. Sometimes, you might see an extra decimal added for ultra-precise measurements—this is known as a pipette. Naturally, the rabbit hole of precision goes deeper with even smaller units of measurement after the pipette, but in most cases, paying attention to pips is quite sufficient.
How Do Spreads Work? 🔎
The spread is the difference between the bid and the ask. You might also hear it called the buy/sell spread. Remember, the bid and ask prices are always from the perspective of the broker.
The bid price is how much the broker will pay for a currency. The ask price is how much they will sell it for. You can think of it as spreading butter on a piece of toast. On a forex chart, the spread is the difference between the bid and ask lines. That space is like your piece of bread.
To calculate this piece of bread just subtract the bid from the ask. For example, if the EUR/USD is 1.2012/1.2017, then the spread is 1.2017 – 1.2012 = 0.0005. We can now confidently say that the EUR/USD spread here is 5 pips (sounding all technical and pro-like isn’t hard, you see?).
Remember that whether the currency is a major, minor, or exotic pair can have a big impact on the spread. So, too, can the forex broker and how they calculate rates—always check your broker’s rate before you trade as they can vary from the ones you see at the bank or at some other brokerage.
Moreover, keep in mind that important news can impact the spreads of forex pairs—for example, how the stimulus checks in the US boosted the EUR/USD.
✅ New to the forex world? Check out the top forex brokers for beginners.
Forex trading is certainly nothing new, but COVID-19 and other events have led to an increase in its popularity. The leading forex trading apps have only made online currency trading more accessible to everyone. However, it’s important to know the basics before diving in.
Once you understand the fundamentals, it’s not difficult to read a forex quote. Nevertheless, understanding how these quotes are calculated and what they mean will be key to your forex trading success—provided you use them to make a forex trading strategy that works.
Forex Quotation FAQs
How do You Quote Exchange Rates?
You quote exchange rates by using acronyms for the two countries involved. For example, EUR/GBP, JPY/AUD, etc. The first currency is the base currency while the second is called the quote currency.
How are Pips Calculated?
Pips are calculated by dividing 1/10,000 or 0.0001 times the exchange rate. Pips show changes in exchange rates and they are crucial for calculating how much one currency has gone up or down in relation to another.
Is Bid/Ask Price the Same as Spread?
They are the same in that the spread is the difference between the bid and the ask price. These are the prices the broker pays for a currency (bid) and the price for which they sell the same currency (ask).
What Does 0.0 Spread Mean?
0.0 spread means what it sounds like—that the bid and ask prices are the same. However, forex brokers have to make money and may charge commissions or other fees. The benefit of a 0.0 spread is it allows traders to know exactly what the spread is and that it won’t change during the trading process.
What Is a Normal Bid/Ask Spread?
What is normal depends on whether you are dealing with a major, minor, or exotic pair. For major pairs, the spread is usually only a few pips. For exotic pairs, the spread can be much higher—potentially several hundred pips.
Get Started with a Forex Broker
If you’ve made it this far, you’re well on your way to actually trading forex. 🚀
The next step involves selecting a top broker you can trust.
Average spread EUR/USD standard
All-in cost EUR/USD - active
Minimum initial deposit
Total currency pairs
Social / copy trading?