Understanding Forex Quotes and Pips (Part 1)
Understanding how currencies are offered for trading on the Forex is not difficult once you become familiar with a few basic concepts.
How to read a FOREX quote
Currencies are traded on the Forex in pairs. The first currency is the Base; the second is the Counter currency. With 1 unit of the base currency, the quote will express how much of the counter currency could be exchanged.
The quote will fluctuate as the base rises or falls in value against the counter. A trader will buy or go long the pair if he believes the base will rise in value; he will sell or go short if he believes the base currency will fall in value against the counter.
Expressed to four decimal places, a Forex quote will reflect the current exchange rate value of the base currency against the counter. Let’s look at some recent quotes for two “Majors”:
The EUR/USD (Euro/US Dollar) pair opened at 1.3365 meaning at that time, one Euro was worth $1.3365 in US Dollars. During the trading day, the Euro strengthened against the US Dollar, reaching a high of 1.3456. At that time, one Euro could buy more US Dollars, $1.3456 to be exact. When the Euro dropped in value against the US Dollar, it reached a low on that trading day of 1.3316. By that time, one Euro could be exchanged for $1.3316 US Dollars.
The GBP/USD (British Pound/US Dollar) pair opened the trading day at 1.5839, meaning one British Pound could be exchanged for $1.5839 US Dollars. As the British Pound rose during the trading day, it reached a high of 1.5889, when $1.5889 US Dollars would be exchanged for one British Pound. When the Pound dropped, it reached a low of 1.5810. At that rate, one British Pound could be exchanged for $1.5810 US Dollars.
Let’s look at Forex quotes for pairs with the US Dollar as the Base Currency:
The quotes for these pairs refer to how much of the counter currency will be exchanged for one US Dollar.
The USD/CHF (US Dollar/Swiss Franc) pair opened at 0.9639. $1 could be exchanged for 0.9639 Swiss Francs. During the trading day, the US Dollar strengthened to reach a high value of 0.9688 Swiss Francs for each $1 and dropped to a low rate of exchange of 0.9606 Swiss Francs for $1 at its weakest point against the Swiss Franc.
The USD/CAD (US Dollar/Canadian Dollar) pair opened at .9890 on this trading day. At the open, $1 would be worth 0.9890 in Canadian Dollars. As the US Dollar strengthened, it rose to a high exchange rate of 0.9978 Canadian Dollars and then weakened to a low rate of 0.9885 Canadian.
Theoretically, if an American in Niagara Falls, NY, traveled over to the Canadian side of the Falls, he could exchange $1US and be given 98 cents in Canadian coins while the day’s exchange rate was at the low. If he happened to make his exchange while the Dollar was stronger against the Canadian Dollar, he would be given 99 cents Canadian.
Direct vs. Indirect Currency Quotes
Despite the Euro’s rise to prominence on the global economic stage and its challenge to the US Dollar as the world’s reserve currency of choice, in the Forex market, the US Dollar continues to reign as the primary reference currency. The US Dollar’s dominance is reflected in the way quotes are described. When the US Dollar is the base currency of a pair, a quote is referred to as a Direct quote. For pairs in which the US Dollar is the counter, such as the EUR/USD pair, a quote is considered Indirect.
Notice that many of the pairs in which the US Dollar is the counter have current or historical ties to Great Britain including GBP/USD pair itself and the Australian and New Zealand Dollar pairs. The relatively new EUR/USD pair may be considered a nod to maintaining the European alliance.
