“Reading foreign exchange rates can be confusing when you don’t know what terms and numbers mean. What is a currency pair? What is the difference between the bid and ask prices? These are some of the questions you can only answer when you can read foreign exchange rates the right way”.
Learning the forex language is a must if you want to be a successful trader. It’s easier to strategize, experiment and arrive at an informed decision when you fully understand the concepts surrounding foreign exchange.
Read on to learn the most important terms that will help you decode charts when you check forex rates on your trusted forex website.
Currencies are quoted in currency pairs because you need to sell a currency to buy another currency or vice versa. Therefore, currency pairs compare the value of one currency against another and indicate how much of the quoted currency is required to purchase one unit of the base currency.
The currency on the left (EUR) is the base currency, while the currency on the right (USD) is the quoted currency. The base currency always remains at one unit, while the quoted currency is the equivalent of one base unit when traded into another currency.
Using the sample quote above, you would have to sell US$1.1339 to buy €1.00. On the other hand, you will get €1.00 when you sell US$1.1339.
DIRECT CURRENCY BID VS INDIRECT CURRENCY BID
There are two types of currency quotes – direct and indirect. A direct currency quote is where the domestic currency is the quoted currency. Here, the domestic currency varies while the foreign currency remains at one unit. With indirect currency quotes, the domestic currency is fixed at one unit while the foreign currency is treated as a variable.
Some currency quotes do not have US dollars in the pair. This is called cross currency, and it allows one foreign currency to be traded for another without needing to exchange that currency for US dollars
Cross currency pairs give you more trading options, but the caveat here is that they are not as popular as those involving the US dollar.
BID AND ASK
When you start trading currencies, it is important to know the prices you should pay attention to. There are two concepts here — the bid price and the Ask price. Simply put, the Bid is the buy price while the ask is the Sell price.
If you want to buy currency, you have to look at the Ask price. This gives you the quoted currency amount that you must pay to purchase one unit of the base currency in the pair. On the other hand, the bid price is the price you check when you sell the base currency unit. This gives you the amount that the market will pay for the quoted currency in the pair.
The more you know about forex, the better you can trade. Always thirsty for new knowledge about forex to expand your trading skill set like decoding forex exchange rates. You have several forex websites and blogs to access a large amount of information and data that can help expand what you know about forex. Remember, successful traders don’t stop learning.