Reading Forex Quotes

Reading Forex Quotes

To a newcomer in the world of trading, forex quotes can be confusing. But they are actually quite simple to read.

Let's look at an example of what a foreign exchange rate quote looks like:

EUR/USD = 1.2526

Seems simple enough, right? This example shows the foreign exchange rate between the Euro and the US Dollar.

It helps to remember that in any forex quote, there will always be two currencies quoted. This is because when you make a trade on the foreign exchange you are in effect buying one currency and selling a second currency at the same time.

When reading forex quotes, the first currency listed is called the base currency. The second currency listed is called the quote currency. Forex quotes show us the price relationship between two currencies.

The exchange rate tells you how many units of the quote currency you have to pay in order to get one unit of the base currency.

In the example above, the base currency is the Euro and the quote currency is the US dollar. The price quote tells us how each currency is trading relative to the other. In order to buy one unit of Euros you will have to sell 1.2526 units of US Dollars.

Still with me? Ok, just one more thing to add to our example: the Bid/Ask spread.

There are no commissions charged on any trades placed in the forex market. But brokers do get paid for their work through the bid/ask spread.

Let's add the spread to our example and I'll explain:

EUR/USD = 1.2526/1.2528

Or, this can be simplified to:

EUR/USD = 1.2526/8

Brokers make their money by selling currencies at a slightly higher rate than they buy them. This is perfectly legal and all brokers do it, though the amount of the spread can vary.

As a trader, you will buy the at bid price, which is the first price quoted. You will sell at the ask price, which is the second price. The difference between the prices is called the spread, which is retained by the broker as their profit on the trade.

In our example, you would buy at 1.2526 and sell at 1.2528. The 0.0002 (2 pips) would go to the broker as payment for executing the trade.

The bid/ask spread is a simple and straightforward way to calculate trading fees and expenses.