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The Basics of Reading a Forex Quote

Newcomers can be baffled by the foreign exchange market and one source of confusion is the forex quote. This small bit of information contained in the forex quote is packed with numbers that may not make sense to unfamiliar eyes looking at this information. Here is a basic explanation of how it works.

A forex trade always involves the selling of one currency and the buying of another. It also contains a bid price and an asking price. A quote might look like this, USD/JPY 118.71/75

What exactly is this number USD/JPY118.71 is actually shorthand for two numbers 118.75 The first USD the base currency the value of the base is always 1 in this case $1 US dollar, the formation states how many of the quote currency , the Japanese yen JPY , you can buy with $1 US dollar.

The 118.71 is the bid price or selling price and the 118.75 is the buying price. So according to this example you can sell $1US dollar for 118.71 Japanese Yen or you can buy $1 US dollar for 118.75 Japanese Yen.

The spread is the difference between the bid price and the ask price and each unit is called a pip . In our example the spread for USD/JPY is 4 pips. For the most commonly traded currencies the spread is usually small. Some spreads may even be as small as 1 pip due to the competition in the trading market.

Less commonly traded currencies will have a greater spread but even the smaller spreads will mount up when you are dealing with hundreds of thousands of units.

 

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