Reading Forex Quotes




To a newcomer in the world of trading, forex
quotes can be confusing. But they are actually
quite simple to read.

Let's look at an example of what a foreign exchange
rate quote looks like:

EUR/USD = 1.2526

Seems simple enough, right? This example shows the
foreign exchange rate between the Euro and the US
Dollar.

It helps to remember that in any forex quote, there
will always be two currencies quoted. This is because
when you make a trade on the foreign exchange you are
in effect buying one currency and selling a second
currency at the same time.

When reading forex quotes, the first currency listed
is called the base currency. The second currency
listed is called the quote currency. Forex quotes
show us the price relationship between two currencies.

The exchange rate tells you how many units of the quote
currency you have to pay in order to get one unit of the
base currency.

In the example above, the base currency is the Euro
and the quote currency is the US dollar. The price
quote tells us how each currency is trading relative
to the other. In order to buy one unit of Euros you
will have to sell 1.2526 units of US Dollars.

Still with me? Ok, just one more thing to add to our
example: the Bid/Ask spread.

There are no commissions charged on any trades placed
in the forex market. But brokers do get paid for their
work through the bid/ask spread.

Let's add the spread to our example and I'll explain:

EUR/USD = 1.2526/1.2528

Or, this can be simplified to:

EUR/USD = 1.2526/8

Brokers make their money by selling currencies at a
slightly higher rate than they buy them. This is
perfectly legal and all brokers do it, though the
amount of the spread can vary.

As a trader, you will buy the at bid price, which is the
first price quoted. You will sell at the ask price,
which is the second price. The difference between the
prices is called the spread, which is retained by the
broker as their profit on the trade.

In our example, you would buy at 1.2526 and sell at
1.2528. The 0.0002 (2 pips) would go to the broker as
payment for executing the trade.

The bid/ask spread is a simple and straightforward
way to calculate trading fees and expenses.