Forex Quotations Explained

A Forex quote shows the relative value of one currency against another, and these currency pairs form the backbone of all transactions in the market.

In this guide, we'll break down how to read Forex quotations, explain what terms like "bid," "ask," and "spread" mean, and explore how currency pairs are categorized. By the end, you'll have a clear understanding of how Forex prices are quoted and how you can interpret them to make informed trading decisions.

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What are Forex Quotes?

In the financial market, a forex quote shows the price of different currencies. It is important to know that your profit or loss depends on the movement of the forex quotes (prices). This means traders need to have a sound understanding when it comes to reading forex quotes. 

So, what exactly is a forex quotation in trade forex? A forex quote is the market price of one currency with reference to another currency. Forex quotes are always in pairs. Forex quotes involve buying one currency by selling another currency. Let’s look at a forex quote involving a EUR and USD.

First, there are 2 currency codes or symbols. The EUR is the currency symbol for the European Union euro. The USD represents the U.S. dollar. The currency codes are also known as International Organization for Standardization codes. They are abbreviations of currencies from every single country in the world. 

Currency codes consist of 3 letters. The first 2 letters represent the name of the country. The last letter represents the name of the currency of that particular country. 

During normal forex market conditions, brokers quote 2 prices for a pair of currencies. The brokers then get the difference between those 2 prices of the currencies.

Forex Currency Pairs

A forex currency pair is a pair of 2 currency codes or symbols present in a forex quote.

All currencies in the foreign exchange market are always quoted in pairs. The logic behind the pairing of currencies is being able to find the value of each currency by comparing it to another currency. A forex currency pair has a base currency and a quote currency (also known as the counter currency). The Forex currency pair will represent the currencies you are trading.

The base currency is the first currency symbol of the forex currency pair (in this case, the GBP). The quote currency is the second currency symbol (USD).

Some of the most common base currencies are:

• EUR (euro)
• USD (U.S. dollar)
• GBP (British pound)
• AUD (Australian dollar)

Any currency can be the quote currency including one of the above common base currencies. In a currency pair, the base currency always equals 1, regardless of the value of the quote currency. Forex currency pairs tell you how much quote currency is needed to buy one value of the base currency. 

Here is an example of a base currency being compared to a quote currency.

Bid and Ask Quotes

A forex quote has 2 parts: 1 bid quote and 1 ask quote. To understand the bid and ask quotes we will use the following example.

EUR/USD = 1.2700/04

In this example, the bid price is 1.27 and the asking price is 1.2704. The difference between the bid quote and the ask quote is very small: 1/100th of the unit. Only the last 2 digits of the 4 trailing digits are shown (in this case 0.04).

EUR/USD = 1.2700/1.2704

The bid price is 1.2700 and the ask price is 1.2704.

The bid price is not the price you will bid when you want to buy a currency pair. The bid and ask quotes are terms, used from the perspective of the forex brokers. If you are a potential buyer, a forex broker will ask for more than what they would bid if you are selling. The bid price is the price at which traders can sell a given currency. The ask price is the price you as a trader can buy a given currency.

From our example, if you want to buy EUR, which is the base currency, you will pay 1.2704 the asking price of the broker. If you are selling, then you will accept 1.2700, which is the broker's bid.

Pips and Spreads in Forex

The spread in forex quotations is defined as the difference between the bid price and the ask price. It's also known as the “bid/ask spread.” The unit of measuring a spread is called a pip. The spread is simply defined as the commission earned by the broker. Instead of brokers charging an extra fee for making any trades, they built the cost into the buy/sell price of the currency pair. 

Another common term you’ll hear when trading on the forex market is “pips.” A pip is a unit measure used in forex markets and the smallest unit of measure in any forex currency quote. The pip is also referred to as ticks or points.

From our example:

EUR/USD = 1.2700/1.2704

The difference between the 1.2700 bid and the 1.2704 ask is 4 pips. The spread is the difference of 4 pips. As a trader, knowing the spread is very important when it comes to buying and selling. Today, forex brokers can state currency pair prices up to the 5th decimal place. This means the pip can fluctuate by even 1/10 of 1 pip. 

Where to Trade Forex

The Language of Forex Trading

As a trader, you will always want to buy forex during low prices and sell when the price goes up. To master the art of forex trading you need to understand the language of forex trading. Forex quotations are the compass to effective forex trading.

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