Tuesday, July 9, 2013

Understanding Complex Forex Quotes

Understanding a Forex quote may be a bit confusing for a new trader. In time it does become quite simple. You need to remember a couple of things. The first currency quoted is what is called the base currency and the value of that currency is always 1.

The US dollar is the central currency of the Forex market and is almost always the base currency in most quotes. The majors includes USD vs JPY, USD vs CHF and USD vs CAD. These currencies are expressed as a unit of 1 dollar USD verses the second currency named in the pair. An example may be USD/JPY 120.01 means one USD dollar is equal to 120.01 Japanese yen.

When the base unit (the U.S. dollar) stays at 1 and the other currency quote goes up increasing to 123.01 (using our previous example), it means base U.S. dollar has gone up in value and the Japanese yen has weakened. There are exceptions to that as the British pound (GBP),the Euro (EUR) and the Australian dollar (AUD). In this example, you will see a number such as GBP/USD 1.4366, this means a British pound is equal to 1.4366 U.S. dollar. In a situation like this where the U.S. dollar isn't the base rate any more, this rising number means a weakening US dollar because now it takes more U.S. dollars to equal the other currency.

You could say if a currency quote is going up above one, that increases the worth of the base currency. A falling number means the base currency is weakening. Pairs that do not use the U.S. dollar are referred to as cross currencies, but they function the same. An example may be, EUR/JPY 127.95 means that a Euro is equal to 127.95 Japanese yen.

When trading Forex, there is quoted a 2-sided buying price and a 2-sided selling price. The difference between the buy and sell price is the spread. When you see a two-sided quote it consists of a 'bid' and 'ask' price. A bid price is the selling price of the base currency at the same time as you buy the counter currency. The ask price is the buying price at of the base currency at the same time you are selling the counter currency.

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