The basics of reading a forex quote

The foreign exchange marketplace can be a baffling place for newcomers, and one of the sources of confusion is the forex quote. A forex quote is a small small piece of information, yet it's packed with records that may possibly not make meaning to someone unfamiliar with the forex structure. Here's a basic explanation of how it works.

A forex quote consists of a currency duo -- forex deals constantly involve simultaneously selling one currency and buying an alternative -- a bid price and an ask price. For instance, one quotation might be this:

USD/JPY 118.71/75

The principal currency is the origin currency, and the other one is the quote currency. The cost of the bottom currency is all the time 1 -- in this case, 1 U.S. Dollar. The figure tells you how many of the quote currency (the Japanese yen, in this case) you can acquire with $1.

But what kind of numeral is 118.71/75? It's actually forex shorthand for two figures: 118.71 and 118.75. The lower digit is the proposition fee, the other is the ask cost. The bid value is the value that dealers will buy the base currency for. The ask cost is what dealers will sell it for.

So if the above were the current quote, it would mean precisely now, you could SELL U.S. Dollars in barter for 118.71 yen per dollar. Or, if you preferred, you can BUY U.S. Dollars at a rate of 118.75 yen per dollar.

The difference amid the bid price and the ask price in a forex quote is called the "spread," and those tiny units are called "pips." In our model, the spread for USD/JPY was four pips. The spread is generally that small used for the a good number commonly traded currencies, which means whatever thing relating the U.S. Dollar, Japanese yen, Great British pound, the euro, Swiss franc or Australian dollar. In reality, thanks to the huge competition in the forex trading marketplace, some quotes will have spread of as little as lone pip.

Of course, for fewer commonly traded currencies, the spread can be much greater. And even after the quotation delivers a small spread, it adds up while you're trading hundreds of thousands of units. If you were dealing with 100 U.S. Dollars, the difference involving selling them for 11,871 yen and buying them for 11,875 yen wouldn't be much at all -- exactly four yen. But if it were 100,000 U.S. Dollars, suddenly that four-pip spread means a 4,000-yen difference. So the spread in a quote is more of the essence than its smallness would imply.