How to read a currency quote in the forex is important for any aspiring trader to understand. In forex, the price of a currency is quoted against another currency’s value. For instance, the price of exchange between the Euro (EUR) and the U.S. dollar (USD) would be expressed in the following way:
EUR/USD = 1.13391
This is known as a currency pair. The currency on the left, in this case the Euro, is referred to as the base currency. The currency to the right of the slash, in this case the U.S. dollar, is known as the counter or quote currency. The base currency is equivalent to one unit while the counter currency is what one unit of the base currency is equal to in terms of the quote currency. Therefore, in the above example, one can purchase 1.13391 U.S. dollars for one Euro.
Direct vs. Indirect Currency Quotes
There are two methods to expressing a currency pair quote: directly and indirectly. Whether a price quote is considered direct or indirect will depend upon whether the domestic currency is the base or quote currency. When a price quote uses the domestic currency as the base currency it is referred to as a direct quote. An indirect quote is when the domestic currency is used as the counter currency.
In other words, if a person in the United States considers the U.S. dollar the domestic currency and the Japanese Yen as the foreign currency, a direct quote would be USD/JPY. On the other hand, an indirect quote would be JPY/USD with the U.S. dollar being the quote currency. A direct quote would vary the foreign currency while in an indirect quote the domestic currency varies.
Forex Price Quotes
When trading forex the U.S. dollar is frequently used as the base currency when expressing the price quote for a currency pair. The USD/JPY would be an example of this. On the other hand, not all currencies use a U.S. dollar basis in forex trading. For example, the Australian Dollar, New Zealand dollar and the British pound are all used as counter currencies against the U.S. dollar when trading forex spot markets. When the U.S. dollar is not one of the currencies in a currency pair the price quote is known as a cross currency, for example the EUR/GBP and EUR/JPY.
However, there is more to trading on the forex market than just understanding the price quotes. Understanding the fundamental economic drivers as well as technical analysis are essential for any investor looking to gain profits from trading in the forex market. Also, proper risk management techniques can be essential in protecting an investor’s account in the case of something unexpected occurring in the markets.
Writer Bio
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.
Sources:
http://www.investopedia.com/university/forexmarket/forex2.asp
