Understanding How Forex Quotes Work

A foreign exchange market quote can be easy to read if two things are always remembered:

• The base currency is the first currency listed
• The base currency's value is always 1

Forex quotes usually revolve around the US dollar which is considered as the base currency. The quote is shown as what the US dollar would be worth in the other currency. For example, a quote indicating USD/JPY 109.38 would mean that 1 US dollar is equivalent to 109.38 Japanese yen.

If the base currency is USD and the quote goes up, that means the US dollar has gained strength in value and the other currency has weakened in value. When quotes rise, the US dollar can purchase more of the other currency than previous.

There are three exceptions when it involves major currencies which are not based on the US dollar. These include the British pound (GBP), Euro (EUR) and Australian dollar (AUD). In this case you may see a quote such as EUR/USD 1.4908 which would mean 1 Euro equals to 1.4908 US dollars. When the US dollar is not the base currency, the rising quote means that the US dollar is weakening and therefore less of the other currency can be bought than before.

Currency pairs not involving the USD are considered cross currencies, although the idea is still the same. An example is GBP/JPY 204.68 which means one British pound is equal to 204.68 Japanese yen.

Just like other financial markets, forex quotes have two sides which include the bid and ask.

• Bid is the price the base currency can be sold for (SELL)
• Ask is the price the base currency can be bought at (BUY)

Since forex trading prices can be significantly liquid, they are quoted in very small increments which are called pips (percentage in point). The 4th decimal that points out or 1/100th of 1% is referred to as a pip. The only exception is the Japanese yen, where pips refer to the 2nd decimal point instead of the 4th.