By now you will know that Forex trading or foreign exchange trading is done by trading currency pairs. The prices of these pairs are known as quotes or quotations. However, there are also direct and indirect Forex quotes. Don't worry if you're not sure what Forex quotes are - we'll cover that in the first section of this article.Being able to understand quotes is useful for all traders, as it allows them to further their knowledge of the Forex market, and possibly establish a career in foreign trade. This article will explain what Forex quotes are and how a Forex direct quote differs from an indirect one. Before we begin, it is worth mentioning that the information provided about Forex quotes will be directly relevant to Forex trading, whilst the other topics we cover are useful for enhancing your knowledge and understanding of the market.
When trading Forex online, you are generally trading currencies of different countries. That being said, you are not just trading US dollars, Canadian dollars, euros or any other currency - you are in fact trading currency pairs. The price of a currency pair is also known as a quote. Whenever you see currency pairs in your trading terminal, they are shown as currency symbols with a price next to them, for example: EUR/USD 1.23456. This means that one euro is sold for 1.23456 US dollars. Next to this, the first currency symbol that is shown, EUR in the example, stands for a base currency, also known as the accounting currency or domestic currency. The second currency in the quote, USD in the example, is the named quote currency. It's important to remember this as it will help you in understanding the definition of a Forex direct quote. In other words, quotes explain the amount of currency units that are needed to purchase one unit of the base currency.
This is rather simple, but let' summarise, as without a clear understanding of currency quotes it will be hard for us to move further.
In the quotation EUR(a) / USD(b) 1.23456(c) the following definitions apply:
(a) is a base currency, a currency that is actually traded.
(b) is a quote currency, a currency that is used to determine the base currency value.
(c) stands for the quote itself - it shows the amount of quote currency units needed to acquire one unit of the base currency.
This is a fundamental element of Forex, so it is worth spending some time getting to grips with it.
Every quote could potentially be a direct one or an indirect one at the same time. This generally depends on your geographical location and your domestic currency. To simplify, a direct quote is a foreign exchange price quotation that can be easily understood, even by a person who doesn't know the exchange rate of his domestic currency to the foreign one.
Let's look at this with an example. Assuming your are from the United States, your domestic currency is the US dollar. In this case, a USD/GBP quote of 0.66 will be a direct quote for you and it will mean that one US dollar can buy 0.66 GB pounds. Conversely, if you were not from the US, but from the UK, you would see USD/GBP quote of 0.66 as an indirect one, where one US dollar could be bought for 0.66 GBP, yet you would not be provided with the knowledge of how many US dollars can be bought with one unit of your domestic currency without calculating it.
In other words, a Forex direct quote shows how many foreign currency units could be bought for a single unit of your domestic currency. This is rather simple and useful for people that want to easily transfer foreign prices into the currency that is more common for them.
Now let's use the example of a European citizen who is visiting the USA. As you know that the EUR/USD rate is 1.23456, you can simply divide all of the prices you see by 1.23456 to determine the EUR value of what you have bought. If this was an indirect quote, let's say USD/EUR 0.8765, this approach would be a bit harder for you.
Now let's take a look at indirect quotes and see how they can be useful too.
Indirect quotes show the exact opposite of direct quotes. Instead of displaying the value of a foreign currency in the domestic one, it shows the value of the domestic currency in a foreign one. Here's an example of an indirect Forex quote. Assume you are from a European country, where the local currency is EUR and you are seeing a quote as USD/EUR 0.8765. This means that one US dollar is sold for 0.8765 euros. However, you have to note that if you were an American, this quote would be a direct one for you.
As you can see, an indirect quote is a little bit harder to understand, as you are seeing the amount of foreign currency you can get for one unit of your base currency. Still, this can be quite easy to use. Whenever you are travelling to a foreign country and you see an indirect quote, you can simply multiply the amount of your purchase by the indirect quote to calculate the value in your domestic currency.
For example, if you are a European travelling to the US and you want purchase a laptop for 1,500 USD, knowing the USD/EUR Forex indirect quote of 0.8500, you can perform the following calculation: 1,500 USD x 0.8500 and you will see that your purchase will amount to 1,275 EUR.
Remember that with a direct quote you had to divide. Well, as the indirect quote is opposite to a direct one, the division is substituted with a multiplication. In the case of a direct quote of EUR/USD 1.17647, you would need to divide 1,500 USD (the price of the laptop) by the direct quote of 1.17647 and you will get exactly the same price in Euros - 1,275 EUR.
When it comes to online trading of currencies, Forex indirect quotes in trading aren't as common. Most of quotes that you see in the trading terminal are displayed in USD or any other major currency as the base - this is why you will rarely find an indirect quote. Next to this, when you are trading on a MetaTrader 4 platform, you will be trading not in USD values, but your transaction size will be measured in lots. A lot stands for 100,000 units of the base currency, so when you are trading 0.01 lots of USD/JPY, you will be trading Japanese yens worth 1,000 USD. The knowledge of Forex quotes and marginal requirements is much more important than the understanding of the direct and indirect quotes when it comes to FX trading online.
Knowledge of the quotes is much more important for cases when you are engaging in foreign trade, or simply travelling the world and need to exchange your domestic currency into a foreign one. Whenever you are approaching a currency exchange, you will most probably see the quotes displayed directly, hence you will see how much local currency can be bought for one (or one hundred) units of your domestic currency. For example, whenever a German travels to Poland, he will most probably see a quote of EUR/PLN of 4.1500. This quote is direct for a German and would mean that he will get 415 PLN in return for his 100 EUR. In some cases you may see an indirect quote Forex displayed at the local exchanges, and this is where the knowledge you have gained will come in handy.
We hope that you have enjoyed this article, and now have a better overview of what Forex quotes are and the differences between direct and indirect ones.