In futures, each point is worth a different dollar amount, depending on the currency. Brokerages typically increase the spread they receive from their market providers as compensation for their service to the end customer, rather than charge a transaction fee. Here is an example of key cross quotes of 4 major currencies:. They reflect only the interest rate differential. A currency pair is the quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. Thus, the spread is the transaction cost of trading currency. The quote convention in forex is based on the fact that there are 2 quotes for any currency, the bid quote and the ask quote, both of which are expressed as a unit of the base currency.
For example, if Canada is the domestic currency, a direct quote would be USD/CAD and means that USD$1 will purchase C$ The indirect quote for this would be the inverse (1/), CAD/USD, which means with C$1, you can purchase US$
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To know how much you are paying or what you are receiving from a currency transaction requires that you know how currencies are quoted. There are no official exchanges for trading currencies; instead, currencies are traded in the over-the-counter market. Consequently, there is no official global exchange rate. Currency exchange rates that are reported in the news and the Internet receive their quotes from various sources, but when a trader decides to do a transaction, the exchange rate will almost certainly be different, because dealers set their prices according to the buy and sell orders that they are currently receiving.
Hence, different dealers will report slightly different rates, although arbitrage helps to remove major discrepancies of the different markets.
There are 3 types of major players in the foreign exchange market: Reporting dealers generally supply the quotes for news organizations and websites, since they conduct most of the foreign exchange transactions, so they have a more accurate picture of the supply and demand for each of the individual currency pairs, which will yield a more accurate foreign exchange rate.
Nonetheless, there will be slight differences in the exchange rate reported by different dealers. Almost all trades by reporting dealers are conducted electronically. Virtually every country, with some small exceptions, has its own currency, and most of them can be traded. However, the currencies of a few countries are the most actively traded, and constitute, by far, the largest volume of trades.
The currencies are unambiguously identified by codes that have been standardized by the International Organization for Standardization ISO. The ISO standard for currencies is ISO , listing both the alphabetic code and numeric code of over currencies, including any minor units of the currency, which is the smallest subdivision of the currency. However, the ISO uses a strange method for depicting the minor unit of a currency. It uses the log base 10 of the number of minor units equal to one unit of the currency.
In fact, most currencies have a minor currency code of 2. The format of the 3-letter alphabetic code: As you can see, each of this symbols ends in " D ", which designates the dollar name. However, sometimes the country name or currency that is symbolized is not the most common name. In addition to currencies, 4 metals — sometimes referred to as either forex metals or FX metals — can also be traded in forex accounts.
Their symbol is formed by appending the element symbol with the letter X:. A 3-digit numeric code is also specified for each currency to facilitate the representation of the currencies in computer systems and to identify currencies for countries that do not use a Latin alphabet.
For instance, USD has a numeric code of One of the purposes of money is as a convenient form of barter. Money is desired not so much for the thing itself, but what it can be exchanged for. Thus, in virtually every transaction, money constitutes one side of the transaction. Thus, money is exchanged for a car, for groceries, for services, and so on. Because money is the universal barter, everything else is measured in terms of it.
Both prices are expressed as the amount of money that would have to be given in exchange for the item. However, there is an equivalent way of thinking about these transactions that allows a better understanding of currency exchanges. Buying a loaf of bread for 2 dollars is the same as selling 2 dollars for a loaf of bread.
In other words, it is nothing more than an exchange. Since money is the medium of exchange, everything is priced in terms of money. But when you buy currency, then both items exchanged are money. When you are looking at currency quotes, it is important to understand the format of the quote. Currency is always quoted in pairs. The 1 st quote is for the base currency , and is a unit of that currency. The 2 nd currency is the quote currency aka counter currency , which is the amount of the currency equal to a unit of the base currency.
Find the approximate foreign exchange rate quickly by typing the currency pair in the search box for Google example: The 2 search engines do not always provide the same quote, so just use it as a quick approximation.
In forex, there is a standard in assigning the base currency to a currency pair, so when currencies are quoted, the currency with higher priority is the base pair. The priority of the major currencies is as follows:. These currencies are considered to be the major currencies — sometimes referred to simply as the majors — while all other currencies are considered to be minor currencies — sometimes simply referred to as minors.
Forex quotes of a major currency and a minor currency will usually list the major currency as the base currency. However, in certain situations, other types of quotes may be more desirable, and the media may report different quotes. The main advantage of these different types of quotes is that the base currency or quote currency remains the same for different currency pairs, regardless of the currency priority. Currency futures in the US are also reported as American quotes.
There are 4 major types of currency quotes:. Traders of cross currency pairs typically experience less liquid trading conditions and wider spreads than those enjoyed for the forex major pairs. Cross exchange rates can be derived from the more liquid markets of their component currencies quoted versus the U.
Highly liquid examples of cross currency pairs that do not involve the U. Relatively illiquid markets exist for the least liquid tier of currency pairs commonly known as the exotic currency pairs, and dealing spreads can be considerably wider for these pairs as a result. Exotic currency pairs typically consist of the currency of a smaller or emerging economy paired as the counter currency with a major currency like the U.
Dollar or Euro that acts as the base currency. Examples of exotic currency pairs include: Those new to trading forex often ask seasoned traders what the best forex pairs to trade are. For example, a trader using a scalping strategy that has a short average trade duration will usually be looking for the best dealing spreads and the ability to trade significant amounts very quickly.
These popular forex pairs feature the tightest dealing spreads and their markets can handle very large amounts due to the significant number of well capitalized market makers and other participants. On the other end of the trading spectrum, a longer term trend trader who sees an excellent directional opportunity arising in an exotic currency pair might do very well by investing some of their account capital in taking a trade in that pair consistent with their market view.
Nevertheless, due to the illiquidity of many of the exotic currency pair markets, they may want to keep their position sizes modest and be prepared to trade on wider dealing spreads when entering and exiting their positions.
Those trading primarily for time frames somewhere in between those two extremes may find trading opportunities arising in any of the most traded currencies listed in the tables above offered by their forex broker or market maker. Still, if the width of the dealing spread might significantly impact the overall profitability of their trade, then they may wish to focus their trading activities on the forex majors , rather than on the minor or exotic currency pairs.
Professional forex traders tend to be rather colorful individuals, and they often refer to the major currencies and currency pairs by their traditional nicknames. Novice traders should be prepared to understand this important forex market jargon before speaking to a dealer or market maker working at a financial institution. First of all, the U. In addition, the four top traded currency pairs have the following common nicknames: The less actively traded commodity currencies have these traditional nicknames: Being aware of and learning these currency pair nicknames will help novice traders better understand a conversation with professional traders about the forex market, and it will also help clarify forex market commentaries written by professional traders that often use such jargon.
Although many currency traders prefer the high liquidity, tight spreads and simplicity of trading just the six major currency pairs — or even just a subset of them — a time comes in most forex traders careers when they would like to start trading a new currency pair. Also watch out for fixed exchange rate policies that tend to reduce volatility or cause large exchange rate gaps when they are changed. Be very wary of risky geopolitical events like wars, disasters or elections.
In addition, performing a review of long term historical exchange rate charts and implied volatility can help you identify any unusual risks involved in trading the currency pair you might not otherwise have noticed. Trying out your trading strategy for the new pair in a demo account might also make sense so that you can check out the dealing spreads, execution speed, stop loss order slippage, and intraday exchange rate behavior.
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In a currency pair, the first currency is called the base currency and the second is the quote currency, a longtime convention for EUR/USD forex traders. May 01, · Forex Quote Convention Rookie Talk. Forex Factory. Home Forums Trades News Calendar Market Brokers. The quote convention in forex is based on the fact that there are 2 quotes for any currency, the bid quote and the ask quote, both of which are expressed as a unit of the base currency. The symbols show the currency pair, and the numbers list the bid/ask quote for the quote currency (thus the name!).