Introduction
Dissecting the Forex Quote
The foreign exchange market (Forex) deals with the simultaneous buying and selling of currency based on market values. Currency market values are denoted with what's called forex quotes or price quotes. These are the prices that traders refer to when they actually buy and sell money to earn profits. This quote can be confusing at first glance so let's get the general idea on the forex quote to better understand this currency market price.
First of all, you need to know what a currency pair is. All currencies are assigned codes and two codes are matched up to make a currency pair. For instance, USD/CHF means the US dollar/Swiss Franc pair. It's also called "Dollar Swiss" or "Swissy" in forex slang. Another example is EUR/GBP or Euro/British pound, also known as "Euro Sterling". All currencies have a specific code or International Standards Organization (ISO) abbreviation.
A currency pair corresponds to an exchange rate. The first currency is called the base currency and the second is called the counter currency. It is a ratio of the first against the second currency where the base or first currency is always valued at one (1). So when the USD/CHF exchange rate equals 1.2027, it means 1 US dollar is worth 1.2027 swiss francs.
After getting acquainted with a currency pair, we can move on and examine the forex quote. As previously pointed out, the forex involves a simultaneous trade. So, the forex quote consists of a "bid" price and an "ask" price in relation to a currency pair. This is the most basic information that a trader needs to know prior to getting involved in the currency market.
The bid price is the first amount in the quote. It is the price that you can sell one (1) of the base currency for the counter currency in the pair. The ask price, or the second amount in the quote, is the price that you can buy one (1) of the base currency for the counter currency in the pair. Consequently, the bid price equals selling price and the ask price equals buying price in the market. That's the obvious "buy and sell" or more suitably "sell/buy" relationship in the forex bid/ask quote - there's a parallel exchange in association with the base currency.
The forex quote or price quote is the smallest unit price for money in the market and it's quoted down to four decimal places called "pips" or "points". A pip is an acronym for "percentage in point". So the bid and ask prices in a price quote are stated with four decimal places. The reason is that the foreign exchange market is very liquid. Plainly put, the price movements are very minimal despite the large volume of trade that goes on everyday. (The only exception's the USD/JPY which is quoted at two decimal places.)
Therefore, a USD/CHF current quote of 1.2020/1.2027 also means that the USD/CHF has bid/ask price of 1.2020/1.2027. You can sell $1 US for 1.2020 Swiss francs and buy $1 US for 1.2027 Swiss francs.
The forex quote is confusing at first glance. But after dissecting its parts, we know now that it's broken down to three uncomplicated features - the currency pair, the exchange rate and the bid/ask price. So before going online and starting to trade, remember that the forex quote involves two currencies. The first is valued against the second. And the bid/ask price is just the quoted selling/buying price of one (1) of the base currency against the other.