Forex. Learning to Interpret Currency Quotes

by Odrey Wise

The price for changing one currency to another is called quote. Thus a currency quote is a price at which a trader can buy (ASK) or sell (BID) this or that currency. On currency market a quote always consists of two prices - currency quote price at which sellers of this currency are ready to sell it and currency quote price at which sellers of this currency are ready to buy it. Banks market makers in normal market conditions quote for their clients both buy and sell currency prices for which they form the market.

Each transaction in foreign currency include operations with two currencies - and it utterly important to know which of them is base (or fixed) and quote currency (or counter currency). A trader always buys and sells fixed quantity of "base" currency and change currency quantity of a quote depending on currency rate changes.

Quote currency is a denominator and base currency is a numerator. When numerator rises base currency strengthens its positions and its price rises as well, when nominator decreases base currency weakens its positions and becomes cheaper. While naming a quote base currency is always named the first. For example in US dollar-yen quote it is clear that dollar is base currency and numerator; in US dollar-Swiss frank is quote currency, and in pound-US dollar (that is usually called "cable") quote currency is dollar. In currency codes used for introducing currency pairs base currency is usually in the first place and quote currency - on the second. Thus US dollar-yen looks like this USD/JPY; US dollar-Swiss frank is USD/CHF, and sterling-dollar - GBP/USD.

Currency quotes as price of one currency in unit of another one are the following: "direct" - a certain amount of national currency for a unit of national currency and "reverse" - the amount for a national currency unit.

Sometimes you can come across the term "American conditions" meaning direct quote from the point of view of a person staying in the US at the moment. Thus rate quote is expressed in different quantities of American dollars and cents for one unit of foreign currency (e.g. the quote 1.2800 dollars for one euro). In its turn the term "European conditions" stands for a direct currency quote from the scope of people living in Europe (e.g. the quote 0.8000 for one American dollar).

In reality most prices have "direct" quotes i.e. wile buying a newspaper in the street you pay for it X euros or dollars. Within a long period all exchange rates had a direct quote. Dollar rate was quoted on European conditions in Europe and on American ones in the United States. However in late 70s when the currency market began moving towards globalization direction the Americans had to revise this practice. In such a way on the out of the counter market dollars are now quoted on European conditions according to the most of the currencies (i.e. the quantity of foreign currency for one US dollar). This means that dollar is practically always a base currency and foreign currency is quote currency. However we have two considerable exclusions from this general rule. Pound against which dollar is still quote currency. Market makers around the world quote sterling at the price X dollars and cents for pound. The system of decimal quotes calculations was accepted in Great Britain only after 1971 and mathematically it was rather easier to quote various quantities of foreign currency per pound and not visa versa. Money unit of European Union is also quoted in dollars and cents per one euro.

Direct and reverse quotes are inverse numbers and it is easy to get one from another. Financial journals are usually publishing both quotes.

Different banks and exchange offices give different prices for currency buy and sell - different quotes but these quotes remain fixed only within a certain period of time. On currency market quotes are constantly changing as they reflect the current levels of demand and offer (BID/ASK).

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Disclaimer: Foreign Currency trading and trading on margin carries a high level of risk and can result in loss of part or all of your investment. Due to the level of risk and market volatility, Foreign Currency trading may not be suitable for all investors and you should not invest money you cannot afford to lose. Before deciding to invest in the foreign currency exchange market you should carefully consider your investment objectives, level of experience, and risk appetite. You should be aware of all the risks associated with foreign currency exchange trading. All opinions expressed are for informational and analysis purposes only and do not constitute investment advice.