The Anatomy of a Forex Quote

In the foreign exchange market, trading currencies involves a thorough understanding of the definition of a Forex quote. Every currency exchange is performed in pairs; you are buying one currency and you are selling another currency.

Here, the discussion will focus on the Forex quote GBP (or the Great Britain Pound) and USD (or the US Dollar) or the Cable. Particularly, let the example be presented in the standard format:

GBP/USD = 1.49

What’s in a Name?

In the Forex quote GBP/USD = 1.49, there are three important terms to remember: (1) the currency located before / (or slash) is called the base currency, (2) the currency that comes after / is referred to as the counter currency or the quote currency, and (3) 1.49 is the price of the exchange.

It follows that the base currency, GBP, is always equal to 1 unit; GBP = 1. Meanwhile, the counter currency, USD, means that the figure next to it (or the price of the exchange) is the current worth of the GBP in USD.

Currency Quote Value and Short & Long Positions

In a Forex quote, the base currency is the currency that you plan on buying or selling; the counter currency, along with the price of the exchange, is the currency unit and the amount (in the said currency unit) that you are supposed to pay.

In the sample Forex quote, it means that if you intend to buy 1 GBP, you would be required to pay 1.49 USD. Or, if you intend to sell 1 GBP, you would receive 1.49 USD in exchange.

Moreover, placing a short position in the Forex market simply means that you are in the selling mode. You choose to be a seller since, based on the current market direction, you can predict that the base currency’s value is heading down. And, conversely, since technical analysis yielded results that suggest the increase in the base currency’s value, you are entering a trade as a buyer; you are placing a long position.

Analyzing a Forex Quote

When analyzing a Forex quote, the concept of direct and indirect currency quoting is introduced. It is indicative of the currency value in terms of foreign and domestic prices, as well as the trader’s current country.

Direct quote vs. indirect quote:

• Direct currency quote – also called priced quotation; it is expressive of foreign currency price in terms of domestic currency

Example (when quoting GBP/USD in the US): 1 USD = 1.49 GBP [or 1.49 GBP ÷ 1 USD]

• Indirect currency quote – also called quantity quotation; it is expressive of domestic currency price in terms of foreign currency

Example (when quoting GBP/USD in the US): 1 GBP = 0.067 USD [or 1 USD ÷ 1.49 GBP]

 

Article by Taylor Wilman