There are two parts to any forex rate: the base currency and the quote currency. The first currency in a quote is called the “basic currency,” and the second is called the “quote currency.”
In the price of EUR/USD 1.2000, the base currency is Euro, and the US dollar is the reference currency.
Bid and ask price
A currency pair can be bought at the bid and ask prices. At the asking price, traders can buy the basic money; at the bid price, they can sell it to buyers.
At the asking price, a trader can buy the base money. The gap is the difference between the bid price and the offer price.
The spread is the fee that the broker takes out of each trade.
Pips
In the world of foreign exchange business, a “pip” is the smallest price change that can happen. The “pip” is the fourth decimal place in a money exchange. There are five pips between the bid and ask prices in the given case.
In some currency combos, however, the last number is not a zero but a pipette or fractional pip.
Currency symbols
A forex quote uses numbers to show the different currencies that are involved. All of the world’s currencies have been given three-letter names by Standardization International (ISO).
The Euro (EUR), the US Dollar (USD), and the Japanese Yen (JPY) are all examples of money symbols.
Currency pair conventions
Depending on the style, several ways to quote currency pairs exist. When you quote, there are two main types of rules: direct and indirect.
In a direct quote, the base currency is known as the local currency, and the foreign currency is the quote currency. In the USD/CAD 1.2000 straight quote, the base currency is the US dollar, and the Canadian dollar is the quote currency.
When the local currency is the “quote” currency, and a foreign currency is the “base” currency, this is called an indirect quote. In the indirect price CAD/USD 0.8333, the Canadian dollar is the quoted currency, and the US dollar is the base currency.
Calculating profit and loss
When selling foreign exchange, you need to be able to figure out how much you made or lost. A currency pair’s pip value change is used to figure out profit and loss.
When a trader or investor buys a currency pair, they stand to gain if the pair’s value goes up and stand to lose if it goes down. But if you sell a currency pair, you make money when the pair’s value goes down and lose money when it goes up.
Bottom line
A forex trader must be able to figure out what a forex quote means. For forex trading to be profitable, you need to know about the different parts of a forex quote, such as the bid and offer price, pips, currency symbols, and currency pair standards. To minimize the costs and make the most money possible, it helps to understand P&L accounting. Anyone can learn to read a forex quote and become a great forex trader if they put in the time and work.
