Foreign exchange quotations explained
When you’re trading online it’s not always possible to trade with your own native currency. In most cases, people trade with foreign currencies such as the United States Dollar or the Euro, simply because they’re the most popular ones.
But one thing you need to consider is that you’re not really trading with currencies. You’re trading with currency pairs. All of these currency pairs have their prices, which are referred to like quotes. All direct and indirect quotes or any other type have their own explanations. Let’s try to break it down and make it easy to understand.
Let’s break down the USD/EUR pair since we’ve already used it in so many examples. This currency pair consists of:
- A base currency - this is the first currency in the pair. In our case it’s USD
- A quote currency - this is the second currency in the pair. In our case it’s EUR
- A quote - this is the exchange rate or the price of the currency pair. In our case, it’s 0.9083
This is a very important thing to know when trading Forex, so most people usually spend quite a lot of time understanding this concept before they start trading at all.
What is a direct quote?
As already mentioned, a direct quote is a currency pair that has a base currency of something you use natively. Let’s try to explain it with a story.
Imagine that you are from Russia and are traveling to Japan. Your native currency is the Ruble, so when you get to Japan you will start looking for a foreign exchange booth to buy some local currency, right?
However, offline exchange booths usually have “Buy” and “Sell” on them. How would you identify direct and indirect quotes? Simple. Imagine how we explained quotes in general previously.
If it says “Buy”, this means that it’s an indirect quote for you. This would be represented like this: JPY/RUB. The Yen would be the base currency here, which means that you will be using it to buy RUB.
What you’re looking for is the “Sell” option. This is the direct quote. It will be represented like this: RUB/JPY. In this case, you will be buying Yen with Rubles. Let’s say that the rate is 1.7397. This means that you can buy 1.73 Yen with 1 Ruble.
What is an indirect quote?
An indirect quote would be the opposite of what we explained above. Instead of the 1.7397 exchange rate, you’d get 0.5744 because you would be buying Rubbles with Yen.