Understanding Forex

How to Read a Forex Quote

Currencies are always quoted in pairs, such as GBPUSD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction, you are simultaneously buying one currency and selling another. Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:

The first listed currency to the left of the slash ("/") is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).

When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example here, you have to pay 1.5143 U.S. dollars to buy 1 British pound.

When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency. In the example above, you will receive 1.5143 U.S. dollars when you sell 1 British pound.

The base currency is the "basis" for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. In caveman talk, "buy EUR, sell USD."

You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency. You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.

What is a pip ?

A pip (Percentage In Point) in Forex is the minimum price movement of a currency pair. For example, in the USDJPY it is 0.01 and in the GBPUSD it is 0.0001. A pip is then worth $10, $1 or $0.1, depending on the size of lots you trade:

Lot size          Name                Pip value
$100,000       Standard                 $10
$10,000         Mini                          $1
$1,000           Micro                       $0.1

Definitions

Forex has three basic classes:

DIRECT RATES:
The first is called a Direct Rate, this is where the USD is the Quote Currency, ie the second value in the Cross Rate. This holds true for such currencies as the EUR,GBP, NZD and the AUD.

INDIRECT RATES:
The second is called a Non Direct Rate,. Most currencies are traded indirectly against the U.S. Dollar (USD), and these pairs are referred to as indirect rates. An example is the USD/CAD (Canadian Dollar). The USD is the "base currency," the CAD is the "quote currency" and the rate quote is expressed as units per USD. An example of a indirect rate is as follows: USD/CAD trading at 1.1500 means that 1 USD = 1.1500 CAD.

CROSS RATES:
Currency pairs that do not involve the USD are referred to as Cross Rates. Even though the USD is not represented in the quote, the USD rate is usually used in the quote calculation. An example of a cross rate the EUR/CHF. In this example of EUR/CHF, the Base Currency is EUR, so to find out what the correct Pip Value would be, in USD, you would have to use the current EUR/USD exchange rate to bring the Quote back into USD. If the EUR/CHF = 1.2227 (for example) and the EUR/USD = 1.3708, then the Pip value in USD would be 1.3708 / 1.2227 or 1.12. In this way you can calculate the correct USD based Pip Value for non USD based Cross Rates.

Fractional Pips

Fractional pips are a new pricing feature which allows you to see more price action detail  A fractional pip is a tenth of a pip and the addition of this feature allows you to take advantage of smaller price increments and moves in the market.

For example, instead of quoting prices with four digits, i.e. EURUSD at 1.4251 / 1.4253, the quote is now with five digits i.e. 1.42508 / 1.42528 with the last digit (sometimes quoted as a subscript) referring to the fractional pip. If (for example) you are trading Standard Lots sizes and as such the pip value for a EURUSD 100,000 position is $10 then the value of a fractional pip for this same position is $1.