Forex Direct Quote vs Indirect Quote
By now you will know that Forex trading (or foreign exchange trading) is performed by trading currency pairs. The prices of these pairs are known as quotes or quotations. However, there are also direct and indirect Forex quotes.
Being able to understand quotes is useful for all traders, as it enables them to increase 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.
What are Forex Quotes?
When trading Forex online, you are generally trading currencies from 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: the Euro to US Dollar currency pair would be displayed like this: 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.
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, and 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.
Source: An example of a Market Order - MetaTrader 4 - Instant Execution - GBPUSD Hourly Chart
What is the Definition of a Forex Direct Quote?
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 necessarily know the exchange rate of their domestic currency in relation to the foreign one. Let's look at this with an example: Assuming you 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 be used to purchase 0.66 GB pounds. Conversely, if you were not from the US, and instead from the UK, you would see a USD/GBP quote of 0.66 as an indirect one, whereby 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 (For example: USD/EUR 0.8765) this approach would be a bit harder for you.
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Now let's take a look at Forex indirect quotes and see how they can be useful too.
What is the Definition of a Forex Indirect Quote?
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 can see a quote like this: 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 to 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, since 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 would get exactly the same price in Euros - 1,275 EUR.
Quotes in Forex Trading
When it comes to the 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. Furthermore, 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.
What is a lot?
A lot stands for 100,000 units of the base currency, so when you are trading 0.01 lots of the USD/JPY currency pair, you would be trading Japanese Yen that is 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.
Quotes for Foreign Trade and Leisure
Knowledge of the quotes is more important for cases when you are engaging in foreign trade, or simply travelling the world, and then coming to a point where you 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, they will most probably see a quote like 'EUR/PLN of 4.1500'. This quote is direct for a German and would mean that they would get 415 PLN in return for 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.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of, or recommendation for, any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
