Quotes in the currency market can be a bit confusing because any position you take in the market is actually two different positions.
In FX you’ll see currencies listed in Pairs. This permits you more options in FX then you get in other markets. For example, you may be bullish on Euro and will therefore buy want to buy the Euro. In FX, you can chose what you want to buy those Euros with. You can buy them with USD, or you can buy them with JPY if you prefer. You can buy Euros with a long list of other currencies that we offer.
So a currency pair will be displayed in this manner.
The first currency listed is referred to as the “base currency”. The second currency listed is considered the “counter currency”. So for EUR/USD, the Euro is the base currency and the US Dollar is the counter currency. If the pair is trading at 1.4700, that quote tells us how much of the Counter currency it would cost to buy one unit of the base currency. So it would cost $1.47 US to buy one Euro.
When it comes to placing a trade, keep in mind that any time you take a position you are doing so in terms of the base currency. So if you buy a pair, you are buying the base currency. If you sell a pair, you are selling the base currency. Then it’s easy to keep in mind that you are always doing the opposite with the counter currency. So, if you buy EUR/USD, you are buying Euros and selling US Dollars.
If that is still a bit too confusing, you can think of it simply this way. Buy if you expect the rate to go up. Sell if you think the rate will go down. Simple as that!
You will always see a two-sided quote in FX. In your account you will always be shown a Buy price and a Sell price. They can also be referred to as the “bid” and “ask” respectively. The Buy price is the rate that you can buy that pair at, and the Sell price is the rate at which you can sell that pair. The difference between the two prices is called the “spread”. The spread is determined by the price providers and liquidity in the markets at that precise moment.
A spread exists for all tradable instruments, stocks, bonds, futures, options, etc, it just isn’t always visible to the trader.
So now you hopefully understand how currency pairs are quoted and what you are buy and what you are selling when you place a trade.
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