MARKET MECHANICS

So now we know that the FX market is the largest in the world and that your broker or institution that you are trading with is collecting quotes from a centralized feed or individual quotes comprising of interbank rates. So how are these quotes made up.

Well, as we previously mentioned currencies are traded in pairs and are each assigned a symbol.

SYMBOLS

USD    For the US dollar
EUR    For the Euro
CAD    For the Canadian dollar
GBP    For the Pounds Sterling
JPY    For the Japanese Yen
AUD    For the Australian dollar
NZD    For the New Zealand dollar
CHF    For the Swiss Frank

EUR/USD would be Euro-Dollar pair.
GBP/USD would be Pounds Sterling-Dollar pair
USD/CHF would be Dollar-Swiss Franc pair and so on.

You will always see the USD quoted first with few exceptions such as Pounds Sterling, EuroDollar,Australia Dollar and New Zealand Dollar. The first currency quoted is called the base currency.

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Have a look below for some example.

Currency Symbol Currency Pair

EUR/USD    Euro / US Dollar
GBP/USD    Pounds Sterling/ US Dollar
USD/JPY    US Dollar / Japanese Yen
USD/CHF    US Dollar / Swiss Franc
USD/CAD    US Dollar / Canadian Dollar
AUD/USD    Australian Dollar / US Dollar
NZD/USD    New Zealand Dollar / US Dollar

When you see FX quotes you will actually see two numbers.

If we use the EUR/USD as an example you might see 1.2635/1.2638 the first number 1.2638 is the bid price and is the price traders are prepared to buy Euros against the USD Dollar.

The second number 1.2635 is the offer price and is the price traders are prepared to sell the Euro against the US Dollar. These quotes are sometimes abbreviated to the last two digits of the currency such as 35/38. Each broker has its own convention and some will quote the full number and others will show only the last two.

You will also notice that there is a difference between the bid and the offer price and that is called the spread. In the EUR/USD the spread is 3 pips. For the four major currencies the spread is normally 5 give or take a pip. (will explain pips later.)

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