Terms Used in a Forex Quote

In our previous article we had explained in detail how to read a Forex quote. Now, we will try to understand the various terms that can be used in relation to a Forex quote.

Cross Currency: When US Dollar is not used in a currency quote then the term Cross Currency is used to denote it. Say there is a quote for GBP/EUR or EUR/JPY. Here, there is no USD involved so, it is called Cross Currency. However, these pairs are not as actively traded on the Forex market as are the ones with USD.

Bid and Ask: When trading of a currency pair happens, there is usually a bid price (to buy) and a ask price (to sell). These prices are in relation of the base price. Let us understand this with the help of an example:

USD/EUR = .78/05. Here bid is .78 and ask is.78+.05 i.e. .83.

The ask price is the price quoted in reference to the currency and is the amount that has to be paid when buying one unit of the said currency with respect to the base currency. The sell price reflects how much of the quoted currency will be obtained when selling one unit of the said currency with respect to the base currency.

When you intend to buy this currency pair, it means you want to buy the base currency and should check out the ask price. Here to buy one USD you have to pay .83 EUR. When selling this pair, you need to look up the bid price. This means that the market will give you .78 EUR in exchange for one USD.

Spreads and Pips: The difference between the bid and ask price is called the spread. Let’s understand this with the help of an example.

EUR/USD = 1.2600/04, the spread here is 0.0004 or 4 pips.

Pips arealso known as points. These movements may seem tiny but one should understand that even the tiniest point change can result in the profit or loss of thousands of dollars. It is also one of the reasons why speculators are so interested in the Forex market.

The smallest amount a price can move in a currency quote is called a pip. For USD, EUR, GBP, one pip would be 0.0001. But with JYP one pip would be 0.01, since the currency is quoted to two decimal places.

Currency Pairs in the Forwards and Futures Markets 

In spot markets, currencies can be quoted against USD or with USD as the base currency. But, in case of forwards or futures markets, foreign exchange always is quoted against the U.S. dollar. You will see that the pricing is regarding you many USD you have to spend to buy a unit of another currency. This means that the quotes of the forwards/futures market and the spot market will not always be similar to one another. 

So, we have covered all the basics of Forex with this article. We will concentrate on the intricacies of Forex Trading in the upcoming articles on this topic.