For those attempting to read Forex quotes for the first time, it can look intimidating. Looks are deceiving, hoewever, as they are not that hard to understand.
Here’s a typical example of a Forex quote:
EUR/USD = 1.2526
Pretty elementary. From here you can see that the exchange rate between the Euro and the US Dollar is 1.2526
Remembering that there are always two currencies in a Forex quote is an aid to understanding it. The reason being that when making a trade, you are actually concurrently buying one currency and selling the other.
So to read Forex quotes, the base currency is the first one listed. The quote currency is the second one. The relationship between the prices of the currencies is what the Forex quote shows.
The rate indicates that you need to pay x amount of the quote currency for a single base currency unit.
Our example shows the Euro as the base currency and the US dollar as the quote currency. It indicates the relationship of the trading value of one currency to the other. Thus, you need to sell 1.2526 units of the USD to purchase a single Euro unit.
Clear so far? There is another figure that you must know, this is the Bid/Ask spread.
Forex trades do not involve any commissions. The bid/ask spread is what provides compensation for the brokers.
Integrating the bid/ask spread to the foregoing quote we get:
EUR/USD = 1.2526/1.2528
Or simply:
EUR/USD = 1.2526/8
So brokers sell currency slightly higher than their buying value. All brokers do it, its not illegal and the spread amount varies.
Since you are a trader, the bid price or the first price is what you will pay. Then you sell at the second price or the ask price. The spread is the difference of the two prices and this is the brokers profit.
Working on our example, you bought at 1.2523 and sold at 1.2528. The 0.0002 or 2 pips represent the brokers profit on your trade.
As you can see, a forex quote bid/ask spread provides us with a forthright, uncomplicated process to determine expenses and fees related to Forex trading.
To see all this in action sign up for some trading accounts and see which one you like better:
1. Easy Forex Trading
2. ForexYard
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