Knowing all about Direct and Indirect Forex Quotes

By | November 14, 2015

Knowing all about Direct and Indirect Forex Quotes

 

Forex quotes

Knowing all about Direct and Indirect Forex Quotes can be handy. One of the basic concepts that all top forex brokers need to understand is how to read  Forex quotes. You know that currencies are traded in pairs, with the currency on the right of the slash being the base and the one on the left being the counter or quote. To better understand, let us look at the EUR/USD currency pair. The euro is the base pair and is worth one unit, while the US dollar is the quote currency and the quote is how much in dollars it will cost to buy a euro. Thus, the EUR/USD quote is 1.43265 or one euro is worth $1.43265.

However, did you know that there are actually two types of quotes? While this is not as important a concept in forex trading, it is still interesting to know and will give you a deeper understanding of exchange rates.

The main difference between direct and indirect quotes is where you are living. Let’s say you are in a European country. The EUR/USD quote above is thus a direct quote, since you are more concerned with what your currency is worth in US dollars. On the other hand, if you were living in the US, the EUR/USD quote is an indirect one since it does not tell you how much your currency is worth in Euros. Hence, the essential difference is the geographical location of the person reading the quote and what their concerns are.

To further illustrate, let’s say you are a French tourist who is visiting the US. The EUR/USD quote is useful for you since you know how many dollars you can exchange your Euros for. Thus, if you have 100 Euros, you can exchange it for $143.26. On the other hand, if you were an American tourist visiting France, the above quote would be confusing for you since you would be interested in exchanging your dollars for Euros. Thus, an understanding of direct and indirect quotes is more useful for tourists and other people who need to exchange their home currencies with those of the place they are visiting.

However, if you only have the indirect quote, it is still easy to determine the direct quote. All you have to do is divide 1 by 1.43265. Thus, one dollar is worth 0.69800 euros.