HOW TO READ A FOREX QUOTE

For a newcomer in the foreign exchange market, one of the sources of confusion is the forex quote. A forex quote is a small bit of information, but packed with numbers that may not make sense to someone unfamiliar with the forex system.

Remember this -- forex transaction always involves simultaneously selling one currency and buying another -- a “bid price” and an “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. For example, one quote might be like this:

USD/JPY 118.71/75

The first currency (USD) is the base currency, and the other one (JPY) is 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 Japanese yen you can buy with $1 US dollar.

But what is the meaning of number 118.71/75? Actually it is a forex short form for two numbers: 118.71 and 118.75. The lower number is the bid price, the other is the ask price.

So in the above case, it would mean that we could SELL U.S. dollars in exchange for 118.71 yen per dollar. Or, if we preferred, we could BUY U.S. dollars at a rate of 118.75 yen per dollar.

In forex quote, the difference between the bid price and the ask price is called the “spread”, and the units are called “pips”. In above example, the spread for USD/JPY was four pips. Usually the spread is such that small for the most commonly traded currencies, normally involving the U.S. Dollar, Japanese Yen, British Pound, the Euro, Swiss Franc or Australian Dollar. In fact, due to the great competition in the forex trading market, some quotes will have spread of as little as one pip.

For less commonly traded currencies, the spread can be much greater. And even when the quotes have a small spread, it adds up when you’re trading hundreds of thousands of units. If you were dealing with 100 U.S. dollars, the difference between selling them for 11,871 yen and buying them for 11,875 yen wouldn’t be much at all -- just four yen. But if it were 100,000 U.S. dollars, it means that four-pip spread will become a 4,000-yen difference. So the spread in a quote is more important than its smallness would suggest.

FOREX CHART – IMPORTANT TOOL FOR TRADERS

Among the most basic tools for a forex trader is the forex chart. Basically, it is a performance graph of a particular currency pair’s over a given period of time. Reading forex charts is essential to a trader’s business. It is very important to know how to read them and understand what they mean.

All forex trading deals with currency from different countries in relation to each other. So, every forex chart will be labeled with a currency pair: USD/GBP, EUR/USD, etc. The USD/CHF chart, for example, tells you how the U.S. Dollar and the Swiss Franc compare.

At the bottom of the chart is the time line, it can be 15 minutes, an hour, a day, a week, or some other period. On the right-hand side are incremental amounts. For the USD/CHF chart, the amounts might be 1.0000 at the bottom, going up to 1.2300 at the top. And at the middle of the chart shows what position the currency pair held regardless the time.

The forex chart is very useful because it shows how a currency pair is doing in form of graphic. By select the time frame helps you see very minor trends (in a 15-minute period) or at longer period (over the course of several days, perhaps). You can see whether a currency is getting stronger or weaker, and you can act accordingly.

Forex chart can be found on web sites all over the Internet, from forex brokers, tutors, and on other forex-related sites. But to be a serious trader, you need to have access to charts much more readily, without having to go to a web site. That’s why trading software gives you forex charts, too and you need to have broadband Internet so you can be “always connected”. Obviously, if you’re going to be trading, you need to have convenient access to the very latest charts.

There are too many possible currency pairs for you to keep track from dozens of world currencies. Forex charts show at a glance what any currency pair is up to, and good software allows you to save multiple charts as “favorites.” Of course you’ll want to monitor the charts representing currencies you’ve already traded, and it’s smart to have a few additional ones saved, too, so you can watch for trends in currencies you haven’t traded yet. You never know when a lucrative new opportunity is going to be revealed.