Lesson 6: Currency Quotes

Currencies are abbreviated to a 3 letter code, EUR = Euro, USD = US Dollar, JPY = Japanese Yen, CHF = Swiss Franc, GBP = GB Pound. In any transaction there are always two commodities, so currencies must be put into pairs. In stocks we sell money to buy stock while companies sell stock to buy money. So in FX we must sell Money to buy Money and vis versa. The most common pairs are the EURUSD, GBPUSD, USDJPY and the USDCHF, aka the "majors". Please note they cannot be reversed ie USDEUR. Generally the currency with the higher IR comes first, with exception of the EUR which always comes first. When reading a quote, ie  "EURUSD 1.30025" we call the EUR the 1st currency, the USD the 2nd currency and the number represents how many 2nd currency (USD) the 1st currency (EUR) can buy. In this case 1 EUR can buy 1.30025 USD. If we buy the EURUSD we would be buying EUR (1st currency) and selling/"borrowing" USDs (2nd Currency). If we sell the the EURUSD we would be selling /"borrowing" EUR's (1st currency) and buying USD (2nd currency), this applies across all pairs. There are 5 decimal places after the 1 in 1.30025 as the FX market is so leveraged (tiny movements = big gains). When we buy or sell our profit/loss is calculated by the last number on the right of the quote, in this case the 5. We call this the pip, (we’re trading in thousandth of a penny increments!) sometimes the 2nd or 3rd number on the right is used as the pip depending on the pair, but don’t worry we’re always told which it is in the order entry screen. Finally when you view a pair there are always 2 prices, the “bid/sell” price (lower) and “ask/buy” price (higher), the difference between them is called the spread and is how brokers make their money. They match a buyer paying 1.30027 with a seller selling at 1.30025 to make a 2 pip profit. On the majors spreads of anything up to 2-3 pips are acceptable.