One of the challenges faced by new traders in the forex market is the issue of quotes, which has to do with the price of currency pairs in the forex market. When a currency is quoted it means that the currency has been paired with another so that the value of that currency is reflected through the value of the other currency. So if we are trying to determine the exchange rate between the US dollar (USD) and the Japanese yen (JPY), the forex quote would appear like this:
USD/JPY = 119.50
This is what is called a Currency Pair. The currency which is on the left (in the case above, USD) is the base currency, while the one on the right (JPY) is the quote currency sometimes called counter currency. In the interpretation of a currency pair, the base currency is always equal to 1; and the quote currency is the value of the base currency regarding the quote currency.
From the example above,
USD/JPY = 119.50
This means that 1USD can buy 119.50JPY
DIRECT QUOTE AND INDIRECT QUOTE
Quoting a currency can be done either directly or indirectly. In a direct currency quote, the domestic currency is quoted; while an indirect quote has the domestic currency as the base currency. It is important for traders to understand this so they can read currency pairs effectively. Here is an example to further illustrate it.
AUD = domestic currency
USD = foreign currency
A direct quote = USD/AUD
An indirect quote = AUD/USD
The direct quote varies the domestic currency, and the base, or foreign currency remains fixed at one unit. On the other hand, in the indirect quote, the foreign currency is variable and the domestic currency is fixed at one unit.
However, in the forex spot market, most currencies are traded against the US dollar, and the US dollar is frequently the base currency in the currency pairs. But all the currencies do not have the US dollar as the base. For instance, British pound, Australian dollar, and New Zealand dollar, are all quoted as the base currencies against the US dollar. Even the euro is quoted the same way too.
A situation where a currency quote is given without the US dollar as one of its components is called Cross Currency. Hence, the most common cross currency pairs are; EUR/GBP, EUR/CHF, and EUR/JPY. These currency pairs expand the trading possibilities in the forex market. At the same time, it is important to note that they are not as actively traded as pairs that include the US dollar, which are also known as the Majors.
In conclusion, with the above explanation of forex quote, a beginner should be confident that he can trade in the forex market.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.