Understanding Forex Quotes

The Forex market can be a confusing place for beginner traders, and one of the sources of confusion is understanding Forex quotes.

A forex quote is a small bit of information, yet it’s packed with numbers that may not make sense to someone unfamiliar with the forex system. Here’s a simple explanation of how it works.

A Forex quote consists of a currency pair. Forex deals always involve simultaneously selling one currency and buying another, a bid price and an ask price. For example, one quote might read like this:

USD/JPY 125.25/75

The first currency is the base currency, and the other one is the quote currency. The value of the base currency is always 1, in this case, 1 U.S. dollar. The number tells you how many of the quote currency (the Japanese yen, in this case) you can buy with $1.

But what kind of number is 125.25/75? It’s actually forex abbreviation for two numbers: 125.25 and 118.75. The lower number is the bid price, the other is the ask price. The bid price is the price that dealers will buy the base currency for. The ask price is what dealers will sell it for.

So if the above were the current quote, it would mean right now, you could sell USD in exchange for 118.71 Japanese Yen per dollar. Or, if you preferred, you could buy USD at rate of 118.75 yen per dollar.

The difference between the bid price and the ask price in a forex quote is called the “spread,” and those tiny units are called “pips.” In our example, the spread for USD/JPY was four pips.

The spread is usually that small for the most commonly traded currencies, which means anything involving the U.S. dollar, Japanese Yen, Great British Pound, the Euro, Swiss franc or Australian dollar. In fact, thanks to the great competition in the forex trading market, some quotes will have spread of as little as one pip.

Of course, for less commonly traded currencies, the spread can be much greater. And even when the quote delivers a small spread, it adds up when you’re trading hundreds of thousands of units.

If you were dealing with 100 U.S. dollars, the difference between selling them for 11,871 yen and buying them for 11,875 yen wouldn’t be much at all, just four yen. But if it were 100,000 U.S. dollars, suddenly that four-pip spread means a 4,000-yen difference. So the spread in a quote is more important than its smallness would suggest.