Beginners in the currency trading market often get confused when it comes to the currency quotes. In this session, we’ll take you through currency quotations and how these quotations work in the currency trading market.
How to Read a Quote?
As you are aware, the quote for a currency is always done with respect to another currency. In simple terms, a currency quote reflects the value of a particular currency with respect to another currency. So, when you are trying to figure out the exchange rate between US dollar and Japanese yen, the quote would look something like this:
USD/JPY = 116.50
This is called a currency pair. The currency on the left side is called the base currency whereas the currency on the right side of the quote is known as counter currency or quote currency. In this case, the base currency is USD and the quoted currency is Japanese yen.
This quote shows the amount of Japanese yen you will get in exchange for one unit of base currency (USD). In simple terms, it means US$1 = 116.50 JPY. If you want to exchange USD for Japanese yen, you will get 116.5 Japanese yen for one US dollar. The forex quote given above uses the currency abbreviations for these particular currencies.
Difference between Direct and Indirect Quote
Currencies are quoted directly as well as indirectly. In fact, this is the biggest source of confusion for beginners in the foreign currency trading market. Here is a brief guide on the difference between direct and indirect currency quote.
In simple terms, a direct currency quote is defined as a currency pair where the quoted currency or counter currency is the domestic currency. On the other hand, the base currency is the domestic currency in case of an indirect quote. So, if you want an indirect quote for Canadian dollar versus US dollar, it will be quoted as CAD/USD whereas the direct currency quote for this currency pair would be USD/CAD.
Another way to remember this concept is to keep in mind that in case of direct quote, the domestic currency varies with regards to the foreign currency or base currency, and the base is fixed at one unit. The opposite happens in case of indirect quote where the domestic currency remains fixed at one unit whereas the foreign currency varies with respect to the domestic currency.