How Forex Trades are Quoted?
Introduction
The world of online Forex trading is expanding at a rapid rate. To be precise, this market witnessed over $6 trillion in transactions and millions of traders speculating on the market. The best part is Forex market is an unlimited ocean of vast possibilities. So, it’s natural to say that more of millions of traders will come and participate foreign exchange market.
To make a profit in fx trading, you need to buy on the cheap and sell when the price is high, however, this doesn’t have to happen in that specific sequence. You need to be familiar with the way currencies are quoted if you want to calculate how much money you are paying or receiving from a currency transaction.
Since there are no official exchanges for trading currencies, over-the-counter markets are where currency transactions take place. As a direct result of this, there is no global exchange rate that is considered official.
Brokers & Fx Market
The most traded currency pairs and their exchange rates that are reported in the news and on the internet receive their quotes from a variety of different sources; however, when a trader decides to do a transaction, Dealers determine their prices in accordance with the buy and sell orders they are currently receiving, thus the exchange rate will almost certainly differ.
As a consequence of this, various dealers will report somewhat different rates, despite the fact that arbitrage serves to eliminate significant disparities between the various marketplaces.
In the foreign exchange market, there are three sorts of key participants: reporting dealers, other financial institutions, and non-financial clients:
Commercial banks, investment banks, and securities firms are examples of the types of businesses that fall under the category of “reporting dealers.” These businesses conduct trades with large corporations, governments, and other financial institutions, and they do so for the benefit of both their customers and their own proprietary accounts.
In addition, they engage in business on the interdealer market. Many of them also act as liquidity providers for brokers, providing the bid and ask prices on currency pairs that are shown to retail consumers on the trading platforms of the brokers.
Other financial institutions are financial institutions that are not reporting dealers, including insurance firms, finance divisions of large corporations, and investment funds, such as pensions, hedge funds, and money markets. Also, central banks, as they sometimes undertake currency transactions to alter the exchange rate.
Customers that do not fall into the first two categories make up the non-financial customer base; the nonfinancial customer base is dominated by corporations and governments.
Since reporting dealers undertake the majority of foreign exchange transactions, they have a more precise understanding of the supply and demand for each currency pair, resulting in a more precise foreign exchange rate. However, there will be some variations in the currency rates quoted by various dealers. Virtually all transactions done by reporting dealers are completed online.
How to Read Currency Pairs?
The International Organization for Standardization has established codes for clearly identifying the currencies (ISO). The ISO standard for currencies is ISO-4217, which lists both the alphabetic code and numeric code of more than 200 currencies, as well as any minor units of the currency, the smallest subdivision of the currency.
However, the ISO depicts the minor unit of a currency in a peculiar manner. The log base 10 of the number of minor units equivalent to one unit of currency is used. Consequently, since 100 cents equals $1, the minor code for USD is 2, as 102 cents equals $1. In reality, the minor currency code for the majority of currencies is 2.
The first two characters represent the nation, while the third letter represents the currency. The most well-known example of this is the United States dollar — USD. The Canadian dollar (CAD), the Australian dollar (AUD), and the New Zealand dollar (NZD) are also referred to as dollars. As can be seen, each of these symbols concludes with the letter “D,” which signifies the dollar name. Occasionally, though, the nation name or currency symbol is not the most popular name.
Thus, the sign for the Swiss franc is CHF, where CH stands for Confederation Helvetica, which refers to Switzerland, and MXN stands for the Mexican Nuevo Peso, despite the fact that the peso is the more recognized word for Mexico’s currency.
In addition to currencies, four metals known as forex metals or FX metals may be traded in forex accounts. Their sign consists of the element symbol followed by the letter X:
- Gold: XAU
- Silver: XAG
- Palladium: XPD
- Platinum: XPT
In order to facilitate the representation of currencies in computer systems and to identify currencies for countries that do not use the Latin alphabet, a three-digit numeric code is also specified for each currency. For example, the numeric code for USD is 840.
One of the functions of currency is to facilitate barter. Money is wanted less for its own sake than for what it may be traded for. Consequently, money forms one side of practically every transaction. Consequently, cash is swapped for a vehicle, food, services, etc. Because money is the global medium of exchange, all other values are measured in terms of it. I can purchase a loaf of bread for $2 and a vehicle for $20,000, respectively. Both prices are stated in terms of the amount of money required to acquire the item.
However, there is a way to view these transactions that facilitates better comprehension of currency exchanges. Buying a loaf of bread for $2 is equivalent to selling a loaf of bread for $2. In other words, this is only a transaction. Since currency is the medium of exchange, all prices are expressed in terms of currency.
However, when purchasing currency, both items exchanged are money. When examining currency quotes, it is essential to comprehend the format of the quote.
Currency Quote Format in the Foreign Exchange Market
Currency is commonly expressed in pairs. The first price is referred to as the base currency, and its value is a unit of that currency. The second currency is referred to as the quote currency (also known as the counter currency), which is the quantity of the second currency that is equivalent to one unit of the base currency.
Base Currency/Quote Currency = Exchange Rate
Consider the following exchange rate:
If GBP/USD=2
This means 1 British pound may be purchased for 2 United States dollars when the GBP/USD ratio is equal to 2.
Quote Currency/Base Currency = 1/(Base Currency/Quote Currency)
Example: If GBP/USD = 2
Then, the exchange rate for USD/GBP is 1/2 = 0.5, and one USD may be obtained by exchanging half a GBP.
Summing up: A quotation for GBP/USD is the amount of United States dollars (USD) required to acquire 1 Great Britain pound (GBP), or how much USD would be received for 1 GBP.
Priorities of Currencies
There is a standard in the foreign exchange for assigning the base currency to a currency pair, so when currencies are quoted, the most traded currency with the highest priority is the base pair. The relative importance of the main currencies is as follows:
- Euro
- British pound (aka Cable)
- The GBP/USD pair is known as the Cable because price quotes were delivered by transatlantic cable in the 19th century.
- Australian dollar (aka Aussie)
- New Zealand dollar (aka Kiwi)
- US dollar
- The Canadian dollar (aka Loonie)
- Swiss franc (aka Swissy)
- Japanese yen
Online Forex Trading platforms will thus quote EUR/USD rather than USD/EUR and USD/CHF rather than USD/EUR. All other currencies are deemed small. Typically, the major currency is listed as the base currency in forex quotations of a major and a minor currency.
In some circumstances, however, several sorts of quotations may be preferable, and the media may report different quotations. The primary benefit of these various forms of quotations is that the base currency or quote currency stays constant across all currency pairings, regardless of currency priority. For example, American forex consumers would be primarily interested in American quotations, since they like to see the value of foreign currencies per $1. In the United States, currency futures are also reported as American quotations.
There are four primary categories of currency quotes:
- Direct Quote: The base currency per unit of the other currency, i.e., the dollar. Currency Quotation / Base Currency
- Indirect Quote: The number of foreign currency units per unit of the base currency; this is how currencies are often quoted, i.e. Base Currency/Quote Currency
- American Quote: The number of USD per unit of another currency, expressed as a direct quote where USD is the base currency, i.e. USD/Unit.
- European Quote: This is an indirect quote where USD is the base currency, i.e. Units/USD. The number of foreign currency units — any foreign currency, not necessarily only the Euro — per 1 USD.
