Price Quote in Forex

Price Quote

When a currency is quoted, it is done in relation to another currency, so that the value of one is reflected through the value of another. Therefore, if you are trying to determine the exchange rate between the (EUR)  and  the  U.S. dollar, the Price quote would look like this: EUR/USD= 1.4036.

This is referred to as a currency pair. The currency to the left of the slash is the base currency, while the currency on the right is called the quote or counter currency. The base currency (in this case, the EUR) is always equal to one unit (in this case, 1 EUR), and the quoted currency (in this case, the USD) is what that one base unit is equivalent to in the other currency. The price quote means that 1 EUR = $ 1.4036. In other words, EUR 1 can buy $ 1.4036. 

Direct Price Quote vs. Indirect Price Quote

There are two ways to price quote in a currency pair, either directly or indirectly. A direct price quote or currency quote is simply a currency pair in which the domestic currency is the base currency  while an indirect price quote or quote, is a currency pair where the domestic currency is the quoted currency. So if you are looking at the EURO as the domestic currency and U.S. dollar as the foreign currency, a direct quote would be EUR/USD, while an indirect quote would be USD/EUR. The direct quote varies the foreign currency and  domestic currency, remains fixed at one unit.

In the indirect price quote, on the other hand, the domestic currency is variable and the foreign currency is fixed at one unit. For example, if EURO is the domestic currency, a direct price quote would be 1.4036 EUR/USD, which means with EUR 1, you can purchase US$1.4036. The indirect price quote for this would be the inverse (1/1.4036), which is 0.712 USD/EUR and means that USD$1 will purchase £ 0.712. 

In the forex spot market, most currencies are traded against the U.S. dollar, and the U.S. dollar is frequently the base currency in the currency pair. In these cases, it is called a direct price quote. This would apply to the above USD/JPY currency pair, which indicates that US$1 is equal to 119.53 Japanese yen.However, not all currencies have the U.S. dollar as the base.

Those price quote currencies that historically have had a tie with Britain, such as the British pound, Australian Dollar and New Zealand dollar - are all quoted as the base currency against the U.S. dollar. The euro, which is relatively new, is quoted the same way as well. In these cases, the U.S. dollar is the counter currency, and the exchange rate is referred to as an indirect price  quote. This is why the EUR/USD quote is given as 1.4036 for example, because it means that one euro is the equivalent of 1.4036 U.S. dollars. 

What is Forex

What is Forex Market?

Before going to trade into Forex Market you must know what is forex or  basic  concept of  forex ?  It is basically describes the buying and selling of currency in foreign exchange market ,especially by traders and investors like you and  me. The familiar saying  “Buy low and Sell high” It is certainly applies to currency trading. In Forex Currency Market traders purchases currencies like  these Currency Pairs GBP/USD or EUR/USD or USD/JPY  that are undervalued and sells currencies that overvalued just like Stock trading.

Foreign exchange (Forex or FX) is the largest  market in the world with daily trading volume over 4 $trillion, the 24 hour market has attracted investors around the globe with it’s high liquidity, low transaction cost. The following  articles aim  to introduce the key concepts in forex trading, the terminologies and characteristics.

This article first introduce the concept of  “spread or difference of bid /ask”, which is most important transaction cost in forex trading, and how the spread presented in price quotes, what is the signification of this and what is tricked behind it. Many retail customers trade with margin account you must have to know the signification of margin, how to trade and how to choose the correct leverage ratio.

Forex market is over-the-counter(OTC) market, which mean there is no central exchange or clearing house where order are matched. It is different level of access, currencies are traded in different market makers.

1. The Interbank Market 

 Large commercial banks trade with each other through the Electronic Brokerage System (EBS). Banks will make their quotes available in this market only to those banks with which they trade. This market is not directly accessible to retail traders.

2- Online Market Maker

Retail traders can access the FX market through online market makers that trade primarily out of the US and the UK. These market makers typically have a relationship with several banks on EBS; the larger the trading volume of the market maker, the more relationships it likely has.

3. Marker Hours

Forex is a market that trades actively as long as there are banks open in one of the major financial centers of the world. This is effectively from the beginning of Monday morning in Tokyo until the afternoon of Friday in New York. In terms of GMT, the trading week occurs from Sunday night until Friday night, or roughly 5 days, 24 hours per day.

4. Spread

there are two prices for each currency pair, a “bid” (or sell) price and an “ask” (or buy) price. The bid price is the rate at which traders can sell to the Market Makers, while the ask price is the rate at which traders can buy from the Market Makers.

5. Margin

It is the amount of equity that must be maintained in a trading account to keep a position open. It acts as a good faith deposit by the trader to ensure against trading losses. A margin account allows customers to open positions with higher value than the amount of funds they have deposited in their account.

Trading a margin account is also described as trading on a leveraged basis. Most online forex firms offer up to 200 times leverage on a mini contract account. The mini contract size is usually 10,000 currency unit, 1/200th of 10,000 equals to 50 currency unit, meaning only 0.5% margin is required for open positions. Compare to future contracts, which require 10% margin for most contracts, and equities require 50% margin to the average investor and 10% margin to the professional equity traders, foreign exchange market offers the highest leverage among the other trading instruments.

The equity in excess of the margin requirement in a trading account acts as a cushion for the trader. If the trader loses on a position to the point that equity is below the minimum margin requirement, meaning the cushion has completely worn out, then a margin call will result. Generally, in online forex trading, the trader must deposit more funds before the margin call or the position will be closed. Since no calls are issued before the liquidation, the margin call is better known as ‘margin out’ in this case. 

The account will be margined out, meaning all the positions will be closed, once the equity falls below the margin requirement. 

Thanks for reading this article next will more attractive… stay tuned

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Currency Pairs

How to understand currency pairs in forex

Currency Pairs

Before going to trade in currencies you must understand currency pairs. they are most popular in forex trading. But sometimes it surprises me how traders want to trade forex while they still don’t  know about currency pairs why I surprised because I taught many advanced forex traders in my trading classes and  they  are previously  trading from many years. We wouldn’t have a Forex market if we weren’t able to compare the value of one currency with the value of another currency. It is this comparison that drives prices. Forex contracts are always quoted in pairs.

What are Currency Pairs ?

They are foundation of forex trading they are paired up and then compared. The first currency listed in the currency pair is called the base currency and the second currency is referred to as the quote currency, or sometimes counter currency. If it is required to buy one unit of the base currency by above mentioned rate For example,  GBP / USD = 1.6567 indicates that you can buy one unit of pound by 1.6567 US dollars. When selling a currency pair, the exchange rate shows how many units of the quote currency you will receive when selling one unit of the base currency.

The bid price is the rate that your broker is willing to pay for the currency pair in other words this is the rate you receive if selling to the market. The ask price is the rate at which your broker is willing to sell and represents the rate you must pay to buy the currency pair. The bid price is always less than the ask price because brokers pay less than they receive for the same currency pair. This difference – known as the spread– is how your broker generates much of its revenue.

The illustration at the top of this line shows how brokers typically display a currency pair to show the current bid and ask price. In this example, the bid is 1.3272 dollars to each euro, while the ask is 1.3276 dollars to each euro.

What are the Major Currency Pairs

Major currency pairs are  involving the US Dollar. The euro versus the U.S. dollar (EUR/USD) is the most heavily traded currency pair. The U.S. dollar versus the Japanese yen (USD/JPY) is another popular pair. These pairs are the most traded and therefore the most liquid. In addition all seven of these pairs have the US dollar as one of the currencies in the pair. The US dollar accounts for over 95% of Forex trades in the market. The seven most commonly traded currency pairs can be grouped into  “Majors”.

What are the Cross Currency Pairs

They do not include the US dollar are commonly referred as Cross Currency Pairs. And some of them move very slowly and trend very well and other move very quickly and extremely volatile. With average movements exceeding 100 pips. Many of these currencies have a higher swap value. Swap is a credit or debit as result of daily interest rates when traders hold positions over night, they are either credited or debit interest based on the rates at the time.

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