quotes might seem too complex for the average user. However, if you plan to be involved in trading, they are obligatory to learn. Quotes can be provided in different ways. Traders must clearly understand quotation types and how to read them.
The education process can take some time. Once you get used to this particular data, you will be able to quickly comprehend it and make well-thought and effective decisions depending on the market conditions.
In this article, we will discuss quotes’ types, nomenclature, and some real-life examples to see how they work.
Experienced market players know that quotes on any exchange market use abbreviations to express the underlying currency. The quotation is actually a standardized currency key or code issued by ISO (International Standard Organization). Different financial organizations and retail traders use these codes to complete operations with currencies across the globe.
The code consists of three alphabets. The 2 first alphabets refer to the country of the currency’s origins. The third alphabet of the key refers to the first letter of the currency’s name. For example, the code for the United States dollar is USD, where the US is the country of origin and D stands for “dollar”.
Traders may come across several exceptions to this rule. Some of you have traded CHF (the Swiss Franc). This currency has a bit of a different code though it is still quite easy to recognize. The same exception works for EUR. The entire key is used to define the EU (European Union).
Now, let’s talk about major quotation types.
Direct quotation is used to express the quotes in terms of the domestic currency. In simpler words, it shows how a single unit of domestic currency relates to a single unit of foreign currency. If you want to exchange 1 unit of the domestic currency, the quote depicts the number of foreign currency units to complete the exchange. Experts often call this method the direct quotation method.
If the value of the domestic currency goes up in case of a favorable economic situation, you will need a smaller amount of foreign currency units for the exchange. Oppositely, if the country’s economy experiences recession and decline, the domestic currency is likely to lose its value. It means you will need fewer foreign currency units in exchange for the domestic currency.
When we say “direct quotes”, we assume 1 unit of domestic currency for the quotation.
As you can see by the name, this method is opposite to the previous one. It is used to express the quote in terms of foreign currency but not a domestic one. To make things easier, we initially assume 1 unit of the foreign currency as well as how many domestic currency units we need in exchange for it.
You may come across situations when the indirect quotation is expressed via 100 units of foreign currency. The technique is also known as the quantity quotation method. The quoted rate is directly correlated with the rate of the domestic currency. If it rises, the domestic currency value goes up. If the quoted rate declines, so does the value of the asset.
Understanding quotes is the first thing every beginner trader should learn. It will hardly be a challenge, as most of you will mainly deal with a direct quotation, which is pretty easy to read. Sometimes, the same quotes can be different depending on the source that provides the quotation. That is a natural thing. Just make sure, your online broker generates relevant and actual data.
The most important thing here is to realize that any quote can be interpreted differently. Market participants must keep an eye on not only the type of quotation but also how it was provided, and what conventions and norms it applies to.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.