Forex quotes and their meanings

Before trading currencies, a new Forex trader has to understand the basic terminology of the Forex Market, including how to interpret Forex quotes.

One of the biggest sources of confusion for the Forex currency trading world beginners is the standard for quoting currencies. In this section, we'll go over currency quotations and how they work in currency pair trades.

So, to make more simple, we are going to talk about the Forex quotes as we were talking about a mathematical formula.

USD/JPY= 119.45

What is that? Well, that is a Forex quote. In case that you are still not familiar with the currency symbols, let`s explain one more time: USD is the abbreviation for the U.S. Dollar and JPY is the abbreviation for the Japanese Yen.

Now, in a Forex quote there is a relationship between the two currencies. The first one (in our case, the U.S. dollar) is called base currency and it is equal to one unit, and the other one( here, the Japanese Yen) is the quote or counter currency is what that one base unit is equivalent to in the other currency.

To be more specific, the quote above can be read like this: 1 U.S. dollar costs 119.45 Japanese Yens.

Direct and indirect currency quote

There are to options to quote a currency pair. The first one is the direct currency quote. It consists in a currency pair in which the domestic currency is the base currency.

The other way that a trader can use is the indirect quote. It is a currency pair where the domestic currency is the quoted currency.

For example, if you are looking at the EUR (euro) as the domestic currency and U.S. dollar as the quote currency, a direct quote would be USD/EUR, and an indirect quote would be EUR/USD.

Most actively traded currency pairs

In the Forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair.

Here are the most popular currency pairs in the Forex currency trading market:

US Dollar / Japanese Yen (USD/JPY) Euro / US Dollar (EUR/USD) British Pound / US Dollar (GBP/USD) US Dollar / Swiss Franc (USD/CHF)

Advantages of Forex quotes

Traders are very interested in quotes, because they represents the best pricing that the Forex currency trading market could offer for a currency pair at a particular moment. Generally, a quote on a computer does not include all the offers and bids from all over the world, but, thanks to the very liquid nature of the Forex currency trading market, any significant difference in quotes across different parts of the world is very quickly eliminated through computer-based and automatic arbitrage.

Short advice

A very important thing to keep in mind is that, when analyzing quotes, one quote is valid for only a fraction of a second. When there are market tensions or crises, great fluctuations have the probability to happen within the scope of one minute.