Forex Trading Basics Tutorial – Learn to Trade
As you learn to trade forex, one of the basic things you need to learn is how to read and understand forex quotes. Forex has its own terminology and style of reporting trades. Your ability to correctly read and understand forex quotes is one of the essential forex trading basics needed to be a successful trader. Fortunately, these quotes are not as confusing as they look at first.
Quoting Currency
When you begin your forex trading tutorial you would learn that the trading market is where currencies are traded against each other. Currencies on trade are quoted in pairs. A pair of two currencies thus signifies one product such as XXX/YYY. Each currency is represented by three letters based on the ISO 4217 international three-letter code of the currency.
In each currency pair quoted, the first currency is known as the ‘base currency’. As an example, in the following pair, USD/JPY, USD is quoted first as is thus the base currency. For GBP/AUD, GBP is the base currency. Base currencies always carry a value of 1. Therefore, in EUR/USD, EUR is the base currency and it carries a value of 1. The USD quoted alongside it indicates how many USD is needed to buy 1 EUR. Similarly, USD/JPY indicates that USD dollars is being traded against JPY Yen and the quote will indicate the exchange rate or how much JPY yen will purchase 1 USD dollar.
Spread and Bid/Ask Quotes
Usually, currency exchange prices are quoted in pairs with a ‘bid and ask price’. For example, with USD/JPY 1.2384/1.2389, the first price quoted 1.2384 is the bid price to sell the base currency, while the one alongside it 1.2389 is the asking price that you buy the base currency. The difference between the bid and ask price is known as the spread.
This difference or ‘spread’ between the bid and ask price is how forex brokers can earn profits without charging commissions to their clients.
Pips
As you learn to trade forex you will encounter the term pip. A pip is the smallest value in a quote. A mathematical definition will be that a pip is the last decimal place of a quotation. In a forex quote, for example if the exchange rate for USD/JPY moves from 1.2384 to 1.2385 it has moved up by one pip. The value of the pip however is different from each currency pair to another. An example is USD/JPY with a rate at 120.76. Here the pip value would be 0.01, the second decimal place, while for EUR/USD 1.2435, one pip would be 0.0001, which is the fourth decimal place.
Examples
As you can see, forex quotes are not so hard to understand. They may look confusing at first but as you advance with your training and forex trading tutorial you would soon understand them at a glance along with other forex trading basics. Below are two examples of forex quotes and their explanation.
GBP/USD 1.7400/10
Base currency= GBP
Bid price= 1.7400; Ask price= 1.7410
When selling Pound, 1 Pound = USD$1.7400; when buying Pound, USD$1.7410 = 1 Pound.
Spread = | 1.7400 – 1.7410 | = 0.001
Pip value= 0.0001
EUR/JPY 127.95/128.00
Base currency= Eur
Bid price= 127.95; Ask price= 128.00
When selling Euros, 1 Euro = JPY127.95; when buying Euros, JPY128.00 = 1 Euro.
Spread = | 127.95 – 128.00 | = 0.05
Pip value= 0.01