Are you inclined to take your first step towards Forex Trading? Well, if that is the case, then, first of all, you need to have a clear perception regarding what FX is all about. Read here our Forex Course on Market Quote.
Disclosing The Concept of Market Quote to The Forex Traders
If we have to explain things in simple words, then FX can be termed as the exchange of one currency over another at the agreed exchange price on the OTC Market.
Now the Forex Market has a lot of scopes. The reason is that it is one of the most traded markets of the world. For example, the US gets an average turnover of about $5.3 million with Forex Trading.
To understand Forex market, we will start by understanding the concept of Forex quotes.
Learning to Read the Quote
When you step into the Forex market, then the biggest confusion for you as the trader is to read the currency quotes.
When you glimpse across the currency quotes, then one thing that will be quite evident is that the currencies are usually quoted in pairs. For example, you might come across the pair USD/JPY. There is a reason behind it. The main reason is that when you make up your mind to buy a currency, then at the same time you are selling a currency as well.
Now here is how a sample quote will look like USD/JPY=120.99.
The currency that is on the left of the slash is the base currency. The currency on the right can be termed as the counter or quote currency.
Here it is important to remember the fact that the base is always equivalent to about one unit. This means for the case of USD; the unit is equivalent to $1. This one base unit is equivalent to the counter currency. This means that if you have decided to buy $1, then you will have to pay an amount of 120.99 yen.
Now you can quote a pair in two ways. Either you can opt for a direct quote or indirect quote.
Now let us consider the above-given example to understand the perception of direct currency.
A direct quote refers to the case when domestic currency acts as the quoted. This means that if you consider the example mentioned above, then a direct quote should look like this USD/JPY.
Here JPY is the domestic currency and USD is the foreign currency.
When the domestic currency becomes the base currency, then it is referred to as an indirect quote.
An indirect quote will look this JPY/USD.
It might be a bit surprising to you, but when you explore the Forex market, then you will notice the fact that most of the trading is managed against the USD.
Moreover, the USD usually takes up the role of the base.
The following image of the Direct and Indirect quote is self-explanatory.
Image Reference: slideshare.net
However, there is a third currency category as well in Forex. It is the Cross Currency. When the USD does not constitute a quote, then it is termed as a cross currency.
For example, EUR/JPY is a cross.
Image Reference: learningcenter.fxstreet.com
Exploring The Concept of Bid, Ask, Spreads and Pip
When you take your first step into the trading world, then there are two important concepts that you just cannot ignore.
These include the bid price and the ask price.
When you purchase a pair, then the ask price is the quoted currency amount that you need to pay to purchase one unit of the base currency. This means that you are trying to enter into a long position.
You make use of the bid price when you sell a pair. It shows how much of the quoted currency you will obtain when you sell the pair. This refers to entering in a short position.
Now you may want to understand the concept of the ask and the bid price with the help of a practical example, so here are the details that you need to know.
Let us assume that you opt for the USD/EUR pair.
USD/EUR: 1.2011/ 06
Now the quote that is present before the slash is the bid price. The quote after the slash is the ask price.
The common trend is that only about two digits of the full price are quoted here at the ask price. It is essential for you to understand that you will always find the bid price to be smaller than the ask price. If you make the decision to buy a pair, then this means that you want to know the ask price in EURO the market will charge you for the USD.
If you make up your mind to sell a pair, then this refers to the fact that you are looking forward to selling the base. This is why you require the bid price here. Well, this means that the market is willingly going to buy US $1 base currency for a EURO price equivalent of 1.2011 and this is the quoted currency here.
The difference between the bid and the ask price is referred to as the spread.
The spread can be termed as the profit that the bank or the broker makes for you when you enter the trade. If the spread is wide, then it will become expensive for you to trade. On the contrary, if the spread is cheap, then trading is going to turn out to be a cheap option for you.
There is another vital concept that needs to be discussed here, and it is the pip. When the exchange rate makes the minimal price moved based on the market convention that is referred to as the pips.
For example, if you look at the quote 1.2011/06. The pips are 6 here. You can also term pip as the points.
Remember that learning to read the Forex quote is the basic requirement if you are yearning to make your mark in the Forex market. This is why make sure that you invest your efforts to polish your concepts about FX.