New to FX Trading? The Difference Between Direct & Indirect Quotes

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If you’re starting to get into Forex trading, you should know how exchange rates are quoted beyond just using a free online currency calculator. Here we explain what the important differences are between direct and indirect quotes, and the key takeaways to remember when you start trading on the FX market.

Currencies are always traded in pairs, and therefore, the cost for exchanging these pairs is determined by the type of quote received. The quote will always be either a direct quote or an indirect quote.

So what is a direct quote? This type of quote is determined by a currency pair. Within the pair, there will be one currency you use natively, as your base currency – or local currency.

For example, you live in the US, and you’re traveling to Spain – you’ll need to exchange your dollars for euros via a foreign exchange broker like ecn brokers. This currency pair, shown as USD/EUR, is a direct quote because the first currency, USD, is the “base currency” (the one you use within your native borders). In this direct quote pair, you’re factoring how many euros you can purchase with one US dollar.

To understand an indirect quote you simply reverse the position of the base currency (USD) in the example above. The pair would now shown as EUR/USD, and the unit price is now expressed in terms of how much USD is needed to purchase one euro.

Here, the indirect quote shows the opposite of a direct quote. However, if you live in Europe, then this currency pair (EUR/USD) is for you, a direct quote.

In summary, there’s no need to worry about whether a currency pair reflects a direct or indirect quote. What’s most important is that you understand the relationship expressed within the pair.

The key point is that the exchange quote is essential to making any currency trade. Without a quote, the base currency cannot be exchanged for the quote currency. Secondly the type of quote you’re receiving is determined by the currency you’re using in your native country and it’s position within the pair.

Furthermore, because the USD is the most dominant global currency, you’re more likely to see it as the base currency in a direct quote. Likewise, most traders focus their method of price calculation on direct quotes because it’s easier to compute.

So, when seeking out direct quotes in USD, all you need to do is look for pairs that start with USD. If the USD/EUR expresses an exchange rate of 0.9897 then you know you can buy .98 euros with one US dollar.

So how are exchange rates determined, and what is their impact on the foreign exchange market? Importantly, there is no one body regulating the exchange market – it is fundamentally decentralised, with trades being completed on the Forex market 24 hours a day, Monday through Friday.

The rates for buying and selling currencies are different and they factor in a set profit margin on the seller’s behalf. In general, foreign exchange rates will fluctuate depending on the strength or weakness of the currency in the pair, which is affected by many national and global economic factors.


1 Comment

  • Reply lara.heaton Friday 13th January, 2012 at 9:51 pm

    No good katy

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