Inside Trade | Ever Changing Price Tag: Currency Quotations

In the Foreign Exchange market, currencies are traded against one another. Their value depends on many aspects such as economic climate, import & export rate, the number of investor and many more. In order for the market value of a specific currency to materialize, currency quotations are made.

Currency Quotations determines the amount of the currency that we're trading. It gives us value of one currency if it is converted to an another currency. It is like the price tags in your local supermarket that determines the price of a product or goods. The only difference is that it constantly changes its price.

Normally a currency in a quotation is defined by the initials of the country then followed by the currency. An example of this is USD. “US” stands for United States and “D” is for the dollars. The Japanese yen also has this kind of format. The “JP” in JPY stands for Japanese and the “Y” for yen.

If you have observed, there are two currencies involved in the quotation. A currency that is stated before “/” is called the Base currency and the currency placed after the it is Counter (Quoted) currency. In the pair USD/CHF, USD is the Base currency and CHF is the Quoted currency.

In the method of currency rate record, when a unit price of a foreign currency is denominated in a certain units of the national currency, it is called a direct quotation. And Indirect quotation when a unit price of a national currency is denominated in certain units of the foreign currency. But bear in mind that there is no national currency at Forex and that US dollars is the currency of the main reserve. That is why direct and indirect quotations are always towards US dollars.

In the formula of A/B=X, “A” may be bought or sold for “X” units of quoted currency “B”. Let us say that you have USD/JPY 97.50. You may buy or sell a dollar for 97.50 Japanese yens.

Online brokers most of the time do not emphasize which is the direct or indirect quotation but it is a must to know “which is which” because you have to know which is against USD. Otherwise a mistake may be omitted and you would lose money. Remember that your aim in Forex is to buy a currency in cheap price and sell it for a higher price.

By the way, the most traded currency pairs are called Majors. They are euro (EU), US dollar (USD), Japanese yen (JPY), pound sterling (GBP), Australian dollar (AUD), Canadian dollar (CAD), and the Swiss franc (CHF). Currency pairs such as EUR/USD, USD/JPY, GBP/USD, AUD/USD, USD/CHF and USD/CAD has the highest liquidity.