Reading Forex Quotes - Understanding Direct And Indirect Quotes
Currency trading is done in pairs and therefore, when a currency rate is quoted, it is in relation to its pair. Beginners must understand the basic terminology used in Forex Trading before beginning to trade. They must understand terms like quote and how it is used to buy and sell currency.
Reading Forex Quote
To understand the meaning of quote, take the example of USD/JPY. In this currency pair, the first currency is known as the base currency and the second currency or the Japanese Yen is the quote. If the forex quote for this pair is USD/JPY = 119.50, it means that for 1 USD, you can buy 119.50 Japanese Yen.
To know how to buy and sell, he must know what bid and ask price is. Bid price is the price at which he is buying and is the price at which he is selling the currency. Therefore, if the currency pair is USD/CAD, the bid price is 1.1735 and ask price is 1.1738, then he is buying USD and selling CAD simultaneously.
Direct Quote and Indirect Quote
Two rates are quotes in pairs and the rate in which one currency is quoted in relation to its pair is called Foreign Exchange rate. For example if 1USD = 96.62 Yen, then this is the Foreign Exchange rate between the two currencies.
There are two ways of quoting currency. It can be directly or indirectly. A direct and indirect quote depends upon the position of the domestic currency. If it is the base currency, then the quote is direct and if it is the quote currency, then it is indirect. So, if you are in Canada, then CAD/USD quote will be direct and USD/CAD will be indirect quote. In the direct quote, the base currency is fixed and the foreign currency changes and the reverse is true of indirect quote.
It is essential to remember one thing. The US dollar is the nucleus around which Forex market revolves. Therefore, except for GBP, AUD and EUR, USD is usually the base currency and all exchange rates, except the three mentioned above, are calculated in terms of US dollar. When the quote increases, it means that USD is worth more than its counterpart or it would be right to say that when the direct quote increases, the base currency is stronger than the quote currency.
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