Reading
a foreign exchange quote may seem a bit confusing at first. However,
it's really quite simple if you remember two things: 1) The first
currency listed first is the base currency and 2) the value of the base
currency is always 1.
The
US dollar is the centerpiece of the Forex market and is normally
considered the 'base' currency for quotes. In the "Majors", this
includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many
others, quotes are expressed as a unit of $1 USD per the second
currency quoted in the pair. For example, a quote of USD/JPY 110.01
means that one U.S. dollar is equal to 110.01 Japanese yen.
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What is a pip?
In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%.
In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503
Among the major currencies, the only exception to that rule is the
Japanese yen. In USD/JPY, the quotation is only taken out to two
decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with
other major currencies).
In USD/JPY, a 3 pip spread is quoted as 114.05/114.08
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When the U.S. dollar is the base unit and
a currency quote goes up, it means the dollar has appreciated in value
and the other currency has weakened. If the USD/JPY quote we previously
mentioned increases to 113.01, the dollar is stronger because it will
now buy more yen than before.
The three
exceptions to this rule are the British pound (GBP), the Australian
dollar (AUD) and the Euro (EUR). In these cases, you might see a quote
such as GBP/USD 1.7366, meaning that one British pound equals 1.7366
U.S. dollars.
In these three currency
pairs, where the U.S. dollar is not the base rate, a rising quote means
a weakening dollar, as it now takes more U.S. dollars to equal one
pound, euro or Australian dollar.
In
other words, if a currency quote goes higher, that increases the value
of the base currency. A lower quote means the base currency is
weakening.
Currency pairs that do not
involve the U.S. dollar are called cross currencies, but the premise is
the same. For example, a quote of EUR/JPY 127.95 signifies that one
Euro is equal to 127.95 Japanese yen.
When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'ask':
The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency).
The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
