How to: Read an FX Quote |
Proper understanding of the way, currencies are quoted, will help a lot in trading Forex. In every Forex transaction, one has to buy a currency and sell another concurrently. Therefore, currencies are constantly quoted in pairs, like USD/JPY or GBP/USD. In case of GBP/ USD, the first one (GBP) is called the base whereas the second one (USD) is called the quote or counter currency.
The exchange rate, in case of buying, refers to a quantity of quote currency in units to be paid in order to buy a quantity of base currency in units. For example, if a foreign currency exchange rate is quoted as GBP/USD = 1.7500, it means that a trader pays 1.7500 USD (quote currency) in order to buy 1 pound of British currency (base currency).
The exchange rate, in case of selling, refers to a quantity of quote currency in units that will be received by selling a quantity of base currency in units. Thus, if a trader sells one unit of 1 British pound (base currency), he would receive 1.7500 USD (quote currency). It has to be noted that the “basis” for buying or selling is the base currency. A simultaneous buy of EUR/USD can refer to a transaction where the base currency is bought and the quote currency is sold at the same time.
When the trader believes in an appreciation about to occur in the base currency as compared to the quote, he will buy the pair. And if he thinks that the base is about to depreciate in its value (go down) as compared to the quote, he will sell the pair.
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