Reading Forex Quotes
A currency pair can be quoted one of two ways, indirectly or
directly. In a direct quote, the currency pair contains a domestic
currency as the base currency. In an indirect quote, the currency
pair contains a domestic currency which is known as the quoted
currency. For example, if you were glancing at quotes were the
domestic currency was the Canadian dollar and the foreign currency
was the USD, the direct quote would appear like this CAD/USD. On the
other hand, USD/CAD would be an indirect quote. In the direct quote,
the foreign currency varies and the domestic or quoted currency is
going to remain fixed as one unit. Whereas, in an indirect quote,
the domestic currency is going to be variable and the currency that
is foreign is going to be fixed at one unit. Within the forex spot
market, you will find that most currencies are being traded against
the USD and in the currency pair, the USD is normally the base
currency. In this case, the quote would be indirect. However, one
must remember that all currencies aren’t going to have the USD as
the base.
The Queen’s Currencies
The Australian Dollar, the British Pound and the New Zealand dollar
are considered the Queen’s currencies because they have a historical
tie to Britain and they are all quotes against the USD as the base
currency. Even though the Euro is relatively new, it is going to be
quoted the same exact way. It is in these cases that the USD is
going to be the counter currency and in these cases, the exchange
rate is going to be labeled as the indirect quote. When trading in
the forex market, it is also important that you are familiar with
cross currencies. A cross currency is a currency quote that has been
given in which; the USD isn’t among the components. It is these
currency pairs that are known to expand the possibilities for
trading in the foreign exchange market however, it is very important
that you take the time to note that these quotes don’t have as much
of a lead way.
Futures and Forwards Markets
In relationship to the forex markets, one of the major technical
differences that are located among the two markets is actually the
way that the currencies are being quoted. In the futures or forward
markets, the foreign exchange is always going to be quoted by the
USD. What this means is that the pricing is being done basically in
terms of how many USDs are going to be needed in order to purchase
just one unit of the other currency. In other markets, the USD is
being quoted against other currencies. Now that that is out of the
way, let’s take the time to learn a little about the bid and ask
prices.
Bid and Ask Prices
When you are learning about financial markets, you are going to
learn that during the time that you are trading one of the currency
pairs, there is going to be a bid price which is the purchase price
and then there is going to be an ask price which is the sell price.
Once again, you have to remember that this information is in
reference to the base currency. When you are purchasing a currency
pair which is referred to as going long, you are going to see that
the ask price is going to refer to the actual amount of the currency
being quoted that has to be paid in order for one single unit of the
base currency to be purchased or it will reflect how much the forex
market is going to sell a single unit of the base currency for in
comparison to the currency being quoted. The bid price is going to
be used at the time that you are selling one of the currency pairs
or going short and it is also going to reflect how much of the
currency quotes is going to be obtained when you sell a single unit
of the base currency as well as how much the forex market is going
to pay for the currency quoted in relationship to the base currency.
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