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How to Read a Forex Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason
they are quoted in pairs is because in every foreign exchange transaction, you are
simultaneously buying one currency by selling another first. Here is an example of a
foreign exchange rate for the Euro versus the U.S. dollar:
ACM Gold Induction Training on Forex Trading
The first listed currency to the left of the slash (“/”) is known as the base currency (in
this example, the Euro), while the second one on the right is called the counter or quote
currency (in this example, the U.S. dollar).
When buying a currency pair, the exchange rate tells you how much you have to pay
in units of the quote currency to buy one unit of the base currency. In the example above,
you have to pay 1.2906 U.S. dollars to buy 1 Euro.
When selling a currency pair, the exchange rate tells you how many units of the quote
currency you get for selling one unit of the base currency. In the example above, you will
receive 1.2906 U.S. dollars when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply
means that you are buying the base currency and simultaneously selling the quote
currency. In caveman talk, “buy EUR, sell USD.”
You would buy the pair if you believe the base currency will appreciate (gain value) relative
to the quote currency. You would sell the pair if you think the base currency will depreciate
(lose value) relative to the quote currency.
Long/Short
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means to buy the base currency and sell the quote
currency), you want the base currency to rise in value, and then you would sell it back at
a higher price. In trader’s talk, this is called “going long” or taking a “long position.”
Just remember: long = buy.
If you want to sell (which actually means to sell the base currency and buy the quote
currency), you want the base currency to fall in value, and then you would buy it back at
a lower price. This is called “going short” or taking a “short position.” position”. Just
remember: short = sell.
Bid/Ask
All Forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is
lower than the ask price.
The bid price is the price at which your broker is willing to buy the base currency in
exchange for the quote currency. This means the bid is the best available price at which
you (the trader) will sell to the market.
The ask price is the price at which your broker will sell the base currency in exchange for
the quote currency. This means the ask price is the best available price at which you will
buy from the market. Another word for ask is the offer price.
The difference between the bid and the ask price is popularly known as the spread.
Traditionally, brokers have use 2, 4 decimal place quotation systems. This meant that for all
currency pairs except for where the Yen is involved, the quotation system will be 4 decimal
places. An example would be GBP/USD quoting at 1.6786, if it moved to 1.6787 then this
is regarded as a 1 pip movement. Any currency where the Yen is involved (because of
the way, the Yen operates) currencies would use a 2 decimal place quotation system. An
example of this would be USD/JPY where if the pair moved from 107.34 to 107.33 then
this is regarded as a 1 pip movement.
In reality, the interbank’s between themselves have always worked on an extra decimal
place for both types of quotation systems, and this is referred to as interbank fractional
pricing. By adding an extra fraction into the quote, it really means that you get a better
spread. ACM Gold has strived hard to ensure that their customers also get the benefit of
this and hence why you see an extra fraction on all the quotes.
So for example on the EUR/USD quote, a bid price would be displayed as 1.29376 and the
ask price is 1.29413. The pip is still calculated on the 4th decimal pip but here the spread
would actually be 3.7 pips instead of 4 pips if it were just using 4 decimal places.
It is important to remember that currency quotes are variable and do adjust during the
trading day depending upon the volatility and the liquidity at any given time.
If you want to sell EUR, you click “Sell” and you will sell euros at 1.29376. If you want to
buy EUR, you click “Buy” and you will buy euros at 1.29413.
The purpose of this induction training, we will mainly use the traditional 2/4 quote systems
to make life slightly easier, but it should only take a day or two’s practice with the ACM
Gold trading platform for a day with fractional pricing to become a master at the difference.
After all, it is been done for your benefit to give you a better pricing system!
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ACM Gold Induction Training on Forex Trading
Rollover
No, this is not the same as rollover minutes from your cell phone carrier!
For positions open at your brokers, if you are buying a currency with a higher interest rate
than the one, you are borrowing, then the net interest rate differential will be positive (i.e.
USD/JPY) and you will earn funds as a result.
Conversely, if the interest rate differential is negative, then you will have to pay.
Every broker or dealer has specific and different policies regarding a rollover.
Cut-off time” (11.pm SA time), there is a daily rollover interest rate that a trader either
pays or earns, depending on your established margin and position in the market.
If you do not want to earn or pay interest on your positions, simply make sure they are all
closed before 11 pm SA time, the established end of the market day.
Since every currency, trade involves borrowing one currency to buy another, interest
rollover charges are part of Forex trading. Interest is paid in the currency that is borrowed,
and earned on the one that is bought.
Also note that many retail brokers do adjust their rollover rates based on different factors
(e.g. account leverage, interbank lending rates). Please check with your broker for more
information on rollover rates and crediting/debiting procedures.
Here is an example chart of the interest rate differentials of the major currencies, which
naturally are continuously fluctuating.
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