What Do You Need to Know About the Forex Quote?
Covid-19 brought notable economic disruptions, creating volatility in the forex market.
Since the pandemic, the forex market has seen a 300% increase in entrants. Of course, with staying home being the new normal and an at-home market being so welcoming, this is bound to happen.
So, this is the right time to jump in if you haven’t already.
In the following paragraphs, we will learn about what forex quotes are and go into just a tad bit more detail to detangle any confusion.
What are Currency Pairs?
Every forex trade has a currency pair. It is precisely what it sounds like: a currency pair.
When you read a forex quote, the first currency is the base currency, while the second is the quote or counter currency.
You sell the quote currency at the given units to get 1 unit of the base currency.
For example, for a EUR/USD pair, EUR is the base currency, and USD is the quote currency. And, if a EUR/USD pair costs 1.20, this means you can buy one EUR for 1.20 USD.
There are three types of currency pairs; minor, major, and exotic. But these are not relevant just yet.
What are Bids and Asks?
Each currency of a forex quote has a bid, and an ask price.
These are the prices at which an owner is ready to buy and sell currencies.
Simply put, the bid price is how much a broker is willing to pay to buy a currency, while an asking price is how much they are ready to sell it for.
An easy formula, with an example, is presented as follows:
EUR/USD = 1.2012 / 1.2017 I.e., base/quote = bid/ask
What is a Spread?
The difference between a bid and ask is the spread.
The currency pair type, minor, major, or exotic, has a significant role in the end spread.
Forex Quotations
These are direct or indirect.
Direct forex quotations are fixed amounts of local/domestic currency against a variable of a foreign currency.
On the other hand, an indirect quote refers to a fixed amount of foreign currency against a variable amount of domestic currency.
Calculating Cross-Currency Rates
A cross-currency pair does not include USD, as most currency pairs do have it.
To calculate, we sell one currency for USD and then use this USD to buy another currency. USD is the base currency for the first pair and a quote currency for the second pair. For example, EUR/USD and USD/CAD will become EUR/CAD.
In the case where USD is the quote currency for both pairs, simply flip the pairs. For example, EUR/USD and AUD/USD will become EUR/AUD.
Bottom Line
Learning about forex quotes is not hard at all; you need to get the hang of it, and it will all seem effortless.
There are some key points to remember, such as calculating cross-currency rates and working with direct and indirect quotations. All you have to do is practice – a little goes a long way.
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