How Forex Quotes Can Influence your Trading Tactics
The price of currency is determined by a number of factors. The most influential factors are political conditions, inflation, and interest rates. Governments often try to control the price of their currency by flooding the market to lower the price or buying extensively to raise the price.
However, the foreign exchange market is the largest in the world, making it difficult to manipulate over the long run. A government may be able to control the price of their currency for a short length of time, but inevitably market forces will prevail. This certainty makes the forex one of the fairest investment options available.
Understanding quotes is an essential component of trading effectively on the forex, but can be somewhat confusing for new traders. Each quote contains a trading symbol, which is a three letter code given to each country’s currency. The most common currencies are the United States dollar, USD, the Japanese yen, JPY, the European Euro, EUR, the United Kingdom pound, GBP, the Australian dollar, AUD, the Swiss franc, CHF, and the Canadian dollar, CAD.
Forex quotes are demonstrated using pairs of currency symbols. There are always two currencies quoted because when you make trade in the foreign exchange market, you are always buying one currency while selling another. The most common pairs of currency are referred to as majors and are GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and USD/CAD.
The base currency is the first symbol listed and is always equal to one. The second symbol is the quote currency. The quote will explain how much it costs to purchase one unit of the base currency. For example, the quote USD/EUR = 0.8567 means one United States dollar costs 0.8567 euros. The opposite would read EUR/USD = 1.8765, meaning that it costs 1.8765 US dollars to purchase one euro. Rates are almost always expressed as five digit numbers.
When the quoted price increases, it means that the base currency is becoming stronger. This means that one unit of the base currency can purchase more of the quote currency. Likewise, if the quote currency price decreases the base currency is weakening. This means that one unit of the base currency can buy less of the quote currency.
Forex quotes are displayed using a bid and ask spread. Usually the symbol is portrayed first, and is followed by the bid price, and then the ask price. The bid price is the amount buyers are willing to pay for the base currency, when selling the quote currency. The ask price is the amount that traders will sell the base currency for, while buying the quote currency.
For example, the quote EUR/USD 1.2565 1.2568 is meant to inform traders that they can purchase one euro for 1.2568 US dollars, or sell Euro for 1.2565 US dollars. This means as a trader you will buy at 1.2565 and sell at 1.2568. The difference between the buy and ask price is referred to as the spread, and is retained by the forex broker as their profit on the trade.
Quotes are often displayed in chart form. These cross currency charts list a variety of different currencies and the values in comparison to each other. These charts typically list the base currencies down the left side of the chart. The currencies that run across the top are the quote currencies. However, not all cross currency charts are laid out using the same format. For that reason it is essential to know at least one pair of currencies to insure that you are reading the chart correctly.
Understanding how to read forex quotes correctly can help you develop efficient trading strategies and achieve success in the foreign exchange market.