H O W C U R R E N C I E S A R E Q U O T E D :

Each currency is given a three-letter code which is used in forex quotes. Currencies trade in pairs,

and that is how they are quoted. For instance, the Euro versus the U.S. dollar (EUR/USD). Or the

U.S. dollar versus the  Japanese yen (USD/JPY). A currency can never be traded by itself, it must be

compared with another currency.

In example, to “go long” (or, to buy) the Euro versus the U.S. dollar, the trader simultaneously buys

the Euro (EUR) and sells the dollar (USD). The first currency referred to in the pair is the base currency, while the second is the counter (or “quote”) currency.

The pair is quoted in units of the counter currency needed to get one unit of the base currency. So,

if the quote EUR/USD is 1.285, it means that 1.285 U.S. dollars are needed to purchase one Euro.

Currency rates are carried out 4 decimal places in most cases. The last decimal place is called a “pip”

or a “point”.

In trading terms, currency pairs are often quoted as bid-ask spreads. This first part of the quote is the

amount of the quote currency you will get in exchange for one unit of the base currency – the bid

price. The second part of the quote is the amount of the quote currency you must spend for one unit

of the base currency – the ask, or “offer” – price.

In the sample above, if the pair was quoted as a EUR/USD spread of 1.2850/1.2852, it means you

can sell one Euro for $1.2850 and buy one Euro for $1.2852.

The full exchange rate might not be quoted for both sides of the spread – it would generally be quoted as 1.2850/52. The only number that is not the same for both sides of the spread is the last number.

Unlike in the stock market, there is no restriction on short selling in the forex market (no “uptick

rule”) when the market happens to be moving lower. Since forex trading involves buying one currency and selling another, traders have the same ability to trade in a rising market as in a falling market.