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So how are these quotes made up? Well,
as we previously mentioned currencies are traded
in pairs and are each assigned a symbol.
For the
Japanese Yen it is JPY, for the Pounds Sterling
it is GBP, for Euro it is EUR and for the Swiss
Frank it is CHF.
So, EUR/USD would be Euro-Dollar
pair. GBP/USD would be pounds Sterling-Dollar pair
and USD/CHF would be Dollar-Swiss Franc pair and
so on. |
You will always see the USD quoted
first with few exceptions such as Pounds Sterling,
Euro Dollar, Australia Dollar and New Zealand Dollar.
The first currency quoted is called the base currency.
Have a look below for some example.
| Currency Symbol |
Currency Pair |
| EUR/USD |
Euro / US Dollar |
| GBP/USD |
Pounds Sterling/ US Dollar |
| USD/JPY |
US Dollar / Japanese Yen |
| USD/CHF |
US Dollar / Swiss Franc |
| USD/CAD |
US Dollar / Canadian Dollar |
| AUD/USD |
Australian Dollar / US Dollar |
| NZD/USD |
New Zealand Dollar / US Dollar |
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When you see FX quotes you will actually
see two numbers. The first number is called the
bid and the second number is called the offer (sometimes
called the ASK).
If we use the EUR/USD as an example
you might see 0.9950/0.9955 the first number 0.9950
is the bid price and is the price traders are prepared
to buy Euros against the USD Dollar. The second
number 0.9955 is the offer price and is the price
traders are prepared to sell the Euro against the
US Dollar.
These quotes are sometimes abbreviated
to the last two digits of the currency such as 50/55.
Each broker has its own convention and some will
quote the full number and others will show only
the last two.
You will also notice that there is
a difference between the bid and the offer price
and that is called the spread. For the four major
currencies the spread is normally 5 give or take
a pip (will explain pips later)
To carry on from the symbol conventions
and using our previous EUR quote of 0.9950 bid,
that means that 1 Euro = 0.9950 US Dollars. In another
example if we used the USD/CAD 1.4500 that would
mean that 1 US Dollar = 1.4500 Canadian Dollars.
The most common increment of currencies
is the PIP. If the EUR/USD moves from 0.9550 to
0.9551 that is one pip. A pip is the last decimal
place of a quotation. The pip or POINT as it is
sometimes referred to depending on context is how
we will measure our profit or loss.
As each currency has its own value,
it is necessary to calculate the value of a pip
for that particular currency. We also want a constant
so we will assume that we want to convert everything
to US Dollars. In currencies where the US Dollar
is quoted first the calculation would be as follows.
Example JPY rate of 116.73 (notice
the JPY only goes to two decimal places, most of
the other currencies have four decimal places)
In the case of the JPY 1 pip would
be .01 therefore
USD/JPY:
(.01 divided by exchange rate = pip value) so .01/116.73=0.0000856.
It looks like a big number but later we will discuss
lot (contract) size later.
USD/CHF:
(.0001 divided by exchange rate = pip value) so
.0001/1.4840 = 0.0000673
USD/CAD:
(.0001 divided by exchange rate = pip value) so
.0001/1.5223 = 0.0001522
In the case where the US Dollar is
not quoted first and we want to get to the US Dollar
value we have to add one more step.
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EUR/USD:
(0.0001 divided by exchange rate = pip value) so
.0001/0.9887 = EUR 0.0001011 but we want to get
back to US Dollars so we add another little calculation
which is EUR X Exchange rate so 0.0001011 X 0.9887 = 0.0000999 when rounded up it
would be 0.0001.
GBP/USD:
(0.0001 divided by exchange rate = pip value) so
0.0001/1.5506 = GBP 0.0000644 but we want to get
back to US Dollars so we add another little calculation
which is GBP X Exchange rate so 0.0000644 X 1.5506 = 0.0000998 when rounded up it
would be 0.0001.
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By this time you might be rolling
your eyes back and thinking do I really need to
work all this out, and the answer is no.
Nearly all the brokers you will deal with will work
all this out for you. They may have slightly different
conventions, but it is all done automatically. It
is good however for you to know how they work it
out. In the next section we will be discussing how
these seemingly insignificant amounts can add up.
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