Reading forex quotes correctly is essential to forex trading but it can be quite confusing for the new comer. Actually, they are quite simple to read and understand. Here is a guideline to reading forex quotes correctly.
Let us look at an example of how a forex rate quote looks like:
EUR/USD = 1.2526
The above looks simple enough, right? This is an example of a foreign exchange rate between the Euro and the US Dollar.
Do not forget that in all forex quotes, there are always two currencies quoted. The forex quote is displayed such because when you make a trade in forex trading, you are always buying one currency and selling another at the same time.
In all forex quotes, the first currency listed is known as the base currency while the second is known as the quote currency. Forex quotes are meant to show us the price relationship between the two currencies.
The foreign exchange rate gives us an indication of how many units of the quote currency we have to pay to get one unit of the base currency.
The above example shows us that the base currency is the Euro and the quote currency is the US dollar. The forex quote tells us how each currency is trading relative to the other. In order to purchase one unit of Euros you will have to sell 1.2526 units of US Dollars.
It should be easy to understand so far. Now let's add an additional thing to our example and that is the bid ask spread.
Forex brokers are paid not on the trades placed in the forex market but on the bid/ask spread instead.
We shall add the bid/ask spread to our example above:
EUR/USD = 1.2526/1.2528
This can be simplified to:
EUR/USD = 1.2526/8
Forex brokers make their commissions by selling currencies at a slightly higher rate than they buy them. This is perfectly legal and all forex brokers do it, though the amount of the spread may vary.
As a forex trader, you will be buying at the bid price, which is the first price quoted. You will then sell at the ask price which is the second price listed. This difference between the two prices is called the spread which is retained by the forex broker as their profit on the trade.
In our above example, you will buy at 1.2526 and sell at 1.2528. The 0.0002 (2 pips) will go to the forex broker as a payment for executing the trade for you.
The bid/ask spread is an easy to understand and clear-cut way for calculating trading fees and expenses.
With a good understanding of how to read forex quotes correctly, it can go a long way in helping you achieve success in forex trading.