Understanding Forex Quotes
Reading a foreign exchange quote may seem a bit confusing at first. However,
it's really quite simple if you remember two things: 1) The first currency listed
first is the base currency and 2) the value of the base currency is always
1.
The US dollar is the centerpiece of the Forex market and is normally
considered the 'base' currency for quotes. In the "Majors", this includes
USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are
expressed as a unit of $1 USD per the second currency quoted in the pair. For example,
a quote of USD/JPY 120.01 means that one U.S. dollar is equal to 120.01
Japanese yen.
When the U.S. dollar is the base unit and a currency
quote goes up, it means the dollar has appreciated in value and the other currency
has weakened. If the USD/JPY quote we previously mentioned increases to 123.01,
the dollar is stronger because it will now buy more yen than before.
The
three exceptions to this rule are the British pound (GBP), the Australian
dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such
as GBP/USD 1.4366, meaning that one British pound equals 1.4366 U.S. dollars.
In
these three currency pairs, where the U.S. dollar is not the base
rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars
to equal one pound, euro or Australian dollar.
In other words, if
a currency quote goes higher, that increases the value of the base currency.
A lower quote means the base currency is weakening.
Currency pairs that
do not involve the U.S. dollar are called cross currencies, but the premise
is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is
equal to 127.95 Japanese yen.
When trading forex you will often see
a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at
which you can sell the base currency (at the same time buying the counter currency).
The 'ask' is the price at which you can buy the base currency (at the same
time selling the counter currency).
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