Currency Trading - How To Read Currency-Pair Quotes
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Currency Trading: Understanding Currency-Pair Quotes
Navigating forex trading can be challenging for newcomers, especially when it comes to understanding currency-pair quotes. Unlike everyday transactions, where you see a single price for an item, forex involves exchanging one currency for another, which can be quite puzzling. This guide aims to simplify the concept for you.
Trading Currencies
Currencies are traded in pairs, such as the U.S. dollar (USD) and the Japanese yen (JPY), represented as USD/JPY. A quote like USD/JPY 116.01/05 indicates a bid price of 116.01 and an ask price of 116.05.
- Bid Price: This is how many units of the counter currency (JPY) you can get for one unit of the base currency (USD). In this example, you receive 116.01 yen for one dollar.
- Ask Price: This shows how many units of the counter currency you need to buy one unit of the base currency. Here, it takes 116.05 yen to purchase one dollar.
The difference between the bid and ask prices is called the spread, measured in pips. A pip is the smallest price move in the exchange rate, and in this case, the spread is four pips, indicating a market maker's profit.
Example with Euro-USD
Consider the Euro-U.S. dollar (EUR/USD) pair. The Euro is the base currency here, not the USD. This setup is common with the "Queen’s currencies," like the British pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD), and the Euro.
Common Currency Pairs
The major currency pairs are EUR/USD, USD/JPY, GBP/USD, and USD/CHF (Swiss franc). There are also commodity pairs like USD/CAD (Canadian dollar), AUD/USD, and NZD/USD. These eight currencies are easier to track than the thousands of stocks in the U.S. market.
Currency pairs involving the USD are standard, but those that don't, like EUR/JPY or GBP/CHF, are known as cross currencies. Not all forex brokers offer every currency pair, so if you have specific pairs in mind, ensure your broker supports them.
Understanding these basics will give you a solid foundation in forex trading and help you make informed decisions.
You can find the original non-AI version of this article here: Currency Trading - How To Read Currency-Pair Quotes.
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