Prices, Quotes and Indications

The price of a currency (in terms of the counter currency), is called “Quote”. There are two kinds of quotes in the Forex market:

Direct Quote: the price for 1 US dollar in terms of the other currency, e.g. –Japanese Yen, Canadian dollar, etc.

Indirect Quote: the price of 1 unit of a currency in terms of US dollars, e.g. –British pound, euro.

The market maker provides the investor with a quote. The quote is the price the market maker will honor when the deal is executed. This is unlike an “indication” by the market maker, which informs the trader about the market price level, but is not the final rate for a deal.

Cross rates – any quote which is not against the US dollar is called “cross”. For example, GBP/JPY is a cross rate, since it is calculated via the US dollar. Here is how the GBP/JPY rate is calculated:

GBP/USD = 1.7464;

USD/JPY = 112.29;

Therefore:  GBP/JPY = 112.29 x 1.7464 = 196.10.

The “majors” and the “exotics”

In forex trading “parlance” there are 6 “major” trades, they comprise over 70% of trading:-

€ / US$; 28.2%

US$/ JPY; 16.7%

£ / US$; 13.8%

A$ / US$; 5.1%

US$/ C$: 4.4%

US$/ SwF; 4.0%

Other trades involving the US$ account for 16.5% of trading.

 “Minor” currencies are usually those of developing countries including Russia, Brazil, South Korea, Malaysia, Mexico. The annual traded volumes of these currencies are around 6-10x annual the respective GNP. 

“Exotic” currencies are currencies that are thinly traded outside their own countries. The Thai baht is a good example of a currency traded mainly between neighbouring countries reflecting physical trade in goods. The Thai baht considered exotic because it trades only low volumes in international markets.

The difference between trading the majors and the exotics is largely in the “spread”. For the very liquid majors, the spread ie the difference between the buying and selling price is very small. However for the exotics, the difference between buying and selling price can be quite large.

The size of the spread is a key factor. For an investor to profit, the position has to “get though the spread” i.e. move in the investors favour by an amount larger than the spread. Hence it is easier to profit from engaging in major trades than in the exotics.

What is “Forex trading”?

“Forex” (foreign exchange) is the buying or selling of overseas currencies. “Forex trading” can be an extremely lucrative business. Famously wealthy currency speculators include Joe Lewis and George Soros. These guys have made fortunes identifying currency trends and anticipating market movements! When we buy overseas goods in local shops, or buy petrol or go abroad, we are part of a currency exchange. The retailer has acquired goods from a wholesaler, who has acquired the goods from a local or EU distributor. Somewhere in this process of goods changing hands, currency trading has been employed as the tool of international trade. The management of currencies is the task of the country’s central bank and/or the Government. There are many forex market participants, including banks, brokers, multi-national companies and investment institutions. Since the relaxation of UK exchange controls in 1979 individuals have been active in the forex market.

Currency dealing or “forex” dealing/ trading takes place in every major city in the world. Major forex centres are London, New York, Tokyo and Sydney. London is the world’s biggest centre for foreign exchange trading worth $3,000bn per day. Forex dealing is popular because it is a highly liquid, transparent market open 24 hours and uses standard terms that are easily understandable. These days forex dealing is so easy you can trade from your own home computer! You can use leverage to increase your exposure to market movements. Forex dealing offers flexibility in that the investor is able to take a more intuitive approach.