Forex trading is essentially the buying of one currency and the simultaneous selling of another. Therefore when trading currencies we will always see them quoted in pairs. When placing a trade we are speculating on which currency we believe will become stronger or weaker against the other with the goal of making a profit from the exchange rate movement.
The currency to the left is called the base currency. The currency to the right is called the quote the currency. The quote currency tells us how much it is worth against 1 unit of the base currency. The base currency is the basis for the buy or the sell trade. When we are buying the base currency, in traders jargon we call this going long looking to profit from the pair rising , and when we are selling the base currency we call this going short looking to profit from the currency pair falling.
Major currency pairs all contain the US Dollar on one side — either on the base side or quote side. The majors generally have the lowest spread and are the most liquid. Historically, if we wanted to convert a currency, we would have had to first convert the currency into US dollars and then into the currency which we desired. With the introduction of currency crosses we no longer have to do this tedious calculation as all brokers now offer the direct exchange rates.
These currency pairs are also known as minors. Exotic Currency Pairs Exotic currency pairs are made up of a major currency paired with the currency of an emerging or a strong but smaller economy from a global perspective such as Hong Kong or Singapore and European countries outside of the Euro Zone.
These pairs are not traded as often as the majors or minors, so often the cost of trading these pairs can be higher than the majors or minors due to the lack of liquidity in these markets. Reading an FX Quote As we have already said, when a currency is quoted it is paired with another currency. So the value of one is reflected through the value of another. The base currency is to the left of the pair and the quote currency is to the right.
In this case the Pound Sterling is the base currency and the Japanese Yen is the quote currency. However when we are trading financial instruments such as currencies we are offered two slightly different prices. The difference between the two prices is what we call the spread and this is how our broker generates revenue.
It is the cost of placing a trade. The difference between the two is 0. In our next article we will discuss the calculation and importance of understanding pips and pip values.
Exotic currency pairs are made up of a major currency paired with the currency of an emerging or a strong but smaller economy from a global perspective such as Hong Kong or Singapore and European countries outside of the Euro Zone. Reading an FX Quote. As we have already said, when a currency is quoted it is paired with another currency. We have the sell price also known as the bid price and the buy price also known as the ask price.
The bid price is the best available price at which we can sell to the market. The ask price is the best available price at which we can buy from the market.More...