Let's look at the general rules around FX quotations in the spot market. In currency trading, we always trade in pairs. One currency is bought and the other is sold.

While this might sound straightforward, it's actually a source of potential confusion when it comes to interpreting price quotes. For instance, if you see a stock price like Microsoft trading at 420, it's clear that you need to pay 420 US Dollars to buy one share. There's no ambiguity. However, in FX things aren't quite as obvious. If someone says, Euro US Dollar trades at 1.09 and you are unfamiliar with this currency pair, it's unclear whether one Euro buys you 1.09 US Dollars or 1 Dollar buys you 1.09 Euros. So how do we interpret this? The general convention in FX markets is that a currency quote is given as the number of units of the quoted currency per one unit of the base currency. This distinction is important for interpreting any FX quote. Think of it like this. The base currency is the currency you are trading, and the quoted currency is what determines its price. To figure out which is the base currency and which is the quoted currency, remember this rule, the currency named first in the pair is always the base currency, and the second one is the quoted currency.

Let's take a look at an example to clarify this. Suppose Euro US Dollar is quoted at 1.0950 to 1.0953. Here, Euro is the base currency and US Dollar is the quoted currency. This quote therefore tells us the price of one Euro expressed in US Dollars. It's not too different from the price of one Microsoft share costing $420, but here the price of one Euro is expressed as a value in another currency.

Now, let's consider that we are quoted two exchange rates. These are referred to as the bid and ask rates also called bid and offer rates. And as a client, you always lose from the difference or spread between these numbers. It's part of how FX traders make their money. Let's have a look at these numbers. If I'm looking to buy Euros, I'd need to pay the ask price, which is 1.0953 US Dollars per Euro. If I'm looking to sell Euros, I'd received the bid price, which is 1.0950 US Dollars per Euro.

Remember, the base currency is the currency you are trading, and the quoted currency is what determines its price. So if you want to buy the base currency, you will have to pay the higher price.

Something else worth noting about FX rates is that in practice, FX quotes are often shown to five digits, and these can be broken into two components. The first three digits are known as the big figure, while the last two digits are referred to as pips or points. For the Euro US Dollar pair, one pip represents 0.0001 or one 10,000th of the quoted currency, which here is the US Dollar. However, the value of a pip can differ across currency pairs. For example, the US Dollar, Japanese Yen pair can be quoted at 149.04 to 149.05. Here the exchange rate is quoted to five digits, and the pips are again, the last two digits. But because of the relative sizes of the Japanese Yen and US Dollar, one pip equals to 0.01 or one 100th of a Japanese Yen.