Understanding and reading Forex quotes

For most traders, the very first thing that they will learn when studying the financial markets is reading Forex quotes. Price quotes are the language of the markets, so it's of no surprise that it's a language that every trader is - or aspires - to be fluent in. Once you become a trader, whenever you hear the word quote, you will automatically think of the financial markets, rather than the official definition of someone repeating the words of another.

Although it can look daunting, the good news is that reading Forex quotes is pretty intuitive and doesn't require much mental effort.

Here is an example: EUR/USD 1.1234/1.1235

Let's figure out how to read Forex quotes, shall we?

Quote name

First of all we have two currency symbols (or ISO codes) separated by a slash. EUR, which is the currency code for the European Union euro - and USD, which is code for the United States dollar. Usually, codes are comprised of the two first letters defining the name of the country and the last letter for the name of the currency. Thus, the United States dollar is the USD, the Great British pound is GBP and the Japanese yen is JPY.

Two codes make a currency pair. All currencies are quoted in pairs. The reason for this is simply because in order to express a value of anything, you need something else to compare it to - or in our case, quote against. Continuing with this example, EUR/USD is a currency pair where the relative value of the euro is expressed in US dollars. The first currency in all Forex trading quotes - in this case the euro - is called the base currency, while the second one is called either the counter currency, terms currency, or quote currency.

Most currencies you will deal with as a spot Forex market trader will be quoted against the US dollar, with a few rare exceptions (mostly from a list of exotic currency pairs). Among the major currency pairs, the only two with the US dollar being the base currency are USD/JPY and USD/CHF. The first pair is easy to read, as it's simply the US dollar against the Japanese yen. However, the second pair, which is the US dollar to the Swiss franc, is more difficult to interpret. This is because the CHF code references the old Roman name of Switzerland, which is Confederatio Helvetia.

The reasons behind currency placements on Forex market quotes takes us back to the days when the Great British Empire was the dominating world power. Back then, everything was quoted against the pound sterling, including the so-called Queen's currencies. Those were the currencies of nations that had historical ties to Britain through their colonial origin, such as Australia, New Zealand and a few others. Only in recent history has the US dollar become the significant player in Forex market.

Combinations of the five most popular world currencies: the US dollar, the euro, the pound sterling, the Japanese yen and the Swiss franc, make a group of Forex major currency pairs. They read as follows: EUR/USD, GBP/USD, USD/JPY and USD/CHF.

Currency pairs comprised of major currencies that do not pair with the US dollar are called cross pairs: EUR/GBP, GBP/JPY, CHF/GBP and so on.

Three more currencies are common in Forex. They are the New Zealand dollar, the Canadian dollar and the Australian dollar. Pair them to the US dollar and you have a group of Forex minors: NZD/USD, CAD/USD and AUD/USD.

All other currency pairs in Forex trading are generally referred to as exotic pairs. They account for less than 15% of all foreign exchange transactions.

Sometimes beginner traders may have trouble understanding Forex quotes when listening to experienced traders, because some popular currencies have nicknames, and by extension so do currency pairs that include them. Other than being used by traders as slang, these nicknames are irrelevant for trading. However, to prevent confusion we have listed these terms for you.

The GBP/USD pair is often referred to as 'cable' or 'the cable', reminiscent of the times when a communications cable under the Atlantic Ocean connected London and New York. USD/JPY is occasionally called 'ninja', while EUR/GBP is known as 'chunnel'. You may also hear 'greenback' used for the US dollar, 'swissy' for the Swiss franc, 'loonie' for the Canadian dollar, 'aussie' for the Australian dollar and 'kiwi' for the New Zealand dollar.

As a professional Forex trader, you're not likely to bother much with the nicknames of currencies and their respective pairs. Everybody simply agrees on the unilaterality of live Forex quotes names to save unnecessary complications and confusion.

Quote value

What you will be bothered with as a trader are the dynamics of Forex quotes. This conveniently brings us to reading the price of a currency pair. The price is the very thing that indicates the current dynamic of a currency pair, and it will often provide the basis as to whether a trade should be made.

To follow on with our example, we're looking at a currency price of 1.1234/1.1235 for EUR/USD. Both of these numbers express the value of the base currency - which is the euro - through the value of the counter currency - which is the US dollar.

The first number is called the bid price. This is simply how much the market bids for the currency. Or in other words, how much you will get in dollars if you sell one euro. The second number is the ask price. This indicates how much in US dollars the market is asking for a single euro, should you chose to buy it.

So the whole quote says: one euro is worth 1.1234 US dollars if you are selling, or 1.1235 if you are buying. Note, the bid price is always smaller than the ask price. This applies to all currency pairs and all financial markets.

Here are a few more free Forex quotes for you to try and interpret:

CHF/JPY 122.34/122.56;

AUD/NZD 1.0101/1.0102

Congratulations! Now you know how it's done.

The spread

There's more information we can draw from Forex live quotes. For instance, the spread can be a useful piece of data for Forex traders. The spread is simply the difference between the bid price and the ask price. It is measured in pips, points, or ticks - which is typically the fourth digit of a quote after a dot. Let's consider our running example of EUR/USD priced at 1.1234/1.1235. The difference between the bid and ask price here is 0.0001. This is the equivalent of saying the spread is one pip.

For a number of years, pips were the minimum price change unit of the market and were often referred to as ticks. Today, brokers can provide currency pair prices to the fifth decimal place - which means that spreads can fluctuate by even just a tenth of a pip. Smaller spreads are generally good for Forex traders, as smaller fluctuations in exchange rates makes it easier for trades to become profitable.

Most traders know that every transition on the Forex market involves buying or selling at the opening of an order - and, reversely, selling or buying at closing.

Thus, if you are going long on EUR/USD, you are first buying euros for dollars at the ask price.

Doing this will make the order open with a slight minus at the equivalent value of the spread. Why does this happen? Because to close the order, you will facilitate a counter transaction and sell appreciated euros for the US dollars at the bid price.

It is important to remember that all buy orders open at the ask price and close at the bid price of a traded instrument. Conversely, all sell orders open at the bid price and close at ask price of the instrument.

It's worth keeping in mind that although a price chart may be reflecting both bid and ask lines for a currency pair, the chart itself is drawn by the bid price.

Some more information

Thanks to the interconnectivity of all traders, Forex quotes represent the best price available on the market at any given time. That's why Forex is a popular choice for investors - it's the most liquid market in the world.

Except in times of major market turbulence, any significant differences in quotes are momentarily negated through an automatic arbitrage.

By extension, this also means that any one quote is only valid for a brief second. At times of great market turmoil, price on the market may change faster than real time Forex quotes.

In order to have a better understanding of price quotes, they are placed in context of each other in the form of a price chart. This chart is nothing but a helicopter view over the price quote history during a selected time interval.

Years ago, Forex traders would have to pay to receive quotes. Thankfully, this is not the case today. Your Forex quotes are free of charge, as are your price charts, your trading platform and your access to the market. Your broker makes sure of that, as long as you use their services.

Now that you know how to read Forex quotes, you are one step closer to becoming a real life professional trader.