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What does a Forex quote look like?

by Wayne Wargo (PenWay.org)

The Forex market operates differently than other markets. A quote in the Forex market is somewhat confusing in the way that a quote is stated. A quotation in this market provides little information to someone not well versed in the Forex market. The currency and numbers combination is actually very simple once you learn it. You don't need a degree in mathematics to understand what you need to know.

Here's a basic 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 be this:

USD/JPY 118.71/75

The first currency is considered the base currency, and the second one is referred to as 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 U.S. dollar.

But what kind of number is 118.71/75? It's actually Forex shorthand for two numbers: 118.71 and 118.75. The lower number is the bid price, and the higher one 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 U.S. dollars in exchange for 118.71 yen per dollar. Or, if you preferred, you could BUY U.S. dollars at a 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 commonly referred to as pips. In the example, the spread for USD/JPY was four pips. The spread is usually that small for the most commonly traded currencies, which means any transaction involving the U.S. dollar, Japanese yen, Great British pound, the euro, Swiss franc or Australian dollar. In fact, thanks to the enormous competition prevalent in the Forex trading market, some quotes will have a spread of as little as one pip.

The spread between the currency pair can be much greater, and it usually occurs with the currencies traded less commonly. And even though the quote is for a small spread, it can really add up when you're trading hundreds of thousands of units. If the trader is dealing with 100 U.S. dollars, for example, the difference between selling for 11,871 yen and buying them for 11,875 yen wouldn't make much sense to do and would not be much of a profit 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 you would ever think.

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