Understanding Forex Quotes

Reading a foreign exchange quote is simple if you remember two things:

      1. The first currency listed is the base currency
      2. The value of the base currency is always 1. 

The US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency.

When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. In other words, a rising quote means that the US dollar can buy more of the other currency than before.

Majors not based on the US dollar

There are three exceptions when the US Dollar is not the base currency of a pair - these exceptions are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR).

For these pairs, the quote is based on the other currency, and a rising quote means that the other currency is strengthening, and the US dollar is weakening.

Cross currencies

Currency pairs that don't involve USD at all are called cross currencies.

Bids, asks and the spread

Just like other markets, Forex quotes consist of two sides, the bid and the ask:

The BID is the price at which you can SELL base currency.
The ASK is the price at which you can BUY base currency.

The spread is the difference between the BID and the ASK, and represents the cost of trading. In Forex, spreads are tighter than many other markets, making it cost effective to trade on relatively small price movements.

What's a pip?

Forex prices are generally very liquid, and are usually quoted in very small increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.

For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies.

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