Before we dive deep into understanding how to read FOREX numbers, aka forex quotes, we need to tackle the terminology.
Every novice trader knows that a trader’s profit or loss is determined by price movements. And a FOREX quote is the price of one currency (Base Currency) against another (Variable/Quote Currency) at a particular point in time. As illustrated in the example below, the price of one Euro is $1.096
The difference between the buying (Bid) price and the selling (Ask) price is called the Spread.
To find the spread for a particular currency pair and other valuable information, members of traderXlab can click on the INFO icon above a currency pair or check the Instruments page.
The combination of two currencies you choose to trade is called a currency pair. Not only does the pair you select to trade matter, but also the time and the potential opportunities. More on the subject you can find in How to Trade Forex on News Releases.
How To Read Forex Numbers – The Basics
Learning to read and understand currency pairs correctly isn’t difficult, however, just because something is simple you must not skip this step.
In the following paragraphs we’re going to look into the basic terminology that includes ISO Code, Base Currency and Variable Currency, Pip, Bid and Ask Price, Spread, Direct and Indirect Quotes.
You may have noticed that currencies are abbreviated to only three letters. Thus, the famous American Dollar is shortened to USD; the Euro becomes EUR and so on. At this point, you may be asking why and who came up with this idea.
We have to thank the International Organization for Standardization (ISO) that develops international standards for literally anything – from soap to spacecraft. And global currencies are no exception.
Base Currency and Variable Currency
As we have already mentioned previously, FOREX trading is based on buying and selling one currency against another. Hence, when we talk about a FOREX quote, we always mean a combination of the two currencies a trader has chosen to trade. The currency that is shown first is called the Base Currency, and the currency that comes last is the Variable Currency, also sometimes called the Quote Currency.
It’s worth noting that the price of the Base Currency is always quoted in units of the Variable Currency.
Point in Percentage, or simply “pip” is a single digit move in the 4th decimal place in a FOREX quote. A pip is used to define the smallest change in value between two currencies.
Bid and Ask Price
“Repetitio est mater studiorum (Repetition is the Mother of Learning),” – says a famous Latin proverb.
Bid = Sell. Ask = Buy.
As it usually goes, buying a currency will typically cost you more than selling it.
It is natural for novice traders to be slightly confused, as we intuitively think of Bid as a call to buy. However, it is crucial to remember that we’re looking at the FOREX quote from the broker’s perspective. Honest companies like traderXlab will always have a useful reminder above a FOREX quote available to all traders.
To put it simply, the Spread is the difference between the Bid and Ask price.
Spreads can be fixed or floating.
Fixed Spread does not fluctuate with the market conditions and when prices change the size of the spread remains constant. Brokers can define the size of the spread on their platforms, so be sure to check it before you start trading.
Floating Spread, unlike Fixed Spread, is a constantly changing value between the Bid and Ask price.
As you can tell, at traderXlab we give preference to the Floating Spread. And there is a very good reason why. The Floating Spread is predominantly lower than the Fixed Spread. The only two exceptions to this rule is holidays and news releases when the spread can widen a lot more.
Word Of Advice
If you’re just getting started or you’re just curious to see a FOREX market in action, you can sign up on traderXlab platform with a trial account. Don’t worry, the registration is free and at this point you don’t even need to go through the KYC process, nor do you need to connect your credit card.