1.17 Forex Exchange Rates and Quotes

 

Because in a Forex transaction we are always dealing with two currencies, the quote is expressed as a pair, and this is how the euro-dollar pair is shown:

Base currency and Quote currency in a currency pair.

 

The currency on the left of the slash mark is called the Base Currency and the one on the other side of the slash is called the Quote Currency.

And YES, EUR/USD is always EUR/USD and the pair will not be referred as USD/EUR. Sometimes Base Currency is also called as Primary Currency and similarly some people may call Quote Currency as Counter Currency.

 

Which Currencies are Base Currencies?

 

It is relative. There are no governing body to set that standard but there is a global understanding about the priority ranking of all major currencies. The priority ranking of major currencies is as follows:

 

  1. Euro
  2. Pound sterling
  3. Australian dollar
  4. New Zealand dollar
  5. United States dollar
  6. Canadian dollar
  7. Swiss franc
  8. Japanese yen

 

Hence if the pair is Australian dollar and United states dollar then the base currency is Australian dollar i.e. the pair will be known as AUD/USD. And if the pair is USD and Canadian dollar then USD becomes the base currency and the pair is known as USD/CAD. In case any of these currencies are paired with any minor currency these will always be the Base Currency.

 

How do you interpret the exchange rate, or quote? 

 

If a Forex broker buy and sell a currency at the same rate then how he will make his profit? Isn't it logical that he would buy at lower rate and sell at higher rate?

Making things complicated: the Bid/Ask Rates

 

Now that you’ve already understood the mechanics of the exchange rate or quote, let’s up the ante a bit and tell you about the ‘two-way quote’. Please refer to the chapters "Forex trading example". 

 

In order to keep things simple we didn’t tell you that the traveler would have seen a rate board in the office of the Forex currency dealer where he went to exchange his euros for dollars. This board would have displayed two-way rates in euros for the various currencies traded by the dealer and looked something like this:

Currencies buying and selling rates.

Don’t bother about the rates displayed – we just want to tell you that there are two rates up there and the second rate (‘we sell’) is the higher of the two. The difference between the two rates is called the ‘spread’ and is the way the dealer makes his money.

 

In Forex trading example, when the traveler bought $14,000 @ EUR/USD = 1.40000, the dealer ‘sold’ it to him at the higher rate, quoted under their ‘We Sell’ sign. Similarly, when the traveler went back to sell his dollars, the dealer ‘bought’ them back at the lower rate, quoted under the ‘We Buy’ sign. The dealer does this throughout the day making a profit of the ‘spread’ on all transactions.

 

In the board above, the two-way quote is also called the ‘bid-ask’ or Forex spread. The ‘bid’ price is the ‘We buy’ price on the left, and the ‘ask’ price is the ‘We sell’ price on the right.

 

This, in essence, is what happens in the Forex market. You and I would see the following screen when we open up the trading platform.

 

 Forex quotes - Bid and Ask quotes

 

Like the traveler at the dealer, you are also buying or selling at the spread; the higher ASK rate (on the right of the quote) for a ‘buy,’ and the lower BID rate (on the left of the quote) for a ‘sell’ transaction.

 
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