Learn the Basics of Forex Trading
Understand the ins and outs of currency trading and get a handle on the forex market.
Understanding Forex Quotes
Reading a foreign exchange quote is simple if you remember two things:
- The first currency listed is the base currency.
- The value of the base currency is always 1.
As the centerpiece of the forex market, the US dollar is usually considered the base currency for quotes. When the base currency is USD, think of the quote as telling you what a US dollar is worth in that other currency.
When USD is the base currency and the quote goes up, that means USD has strengthened in value and the other currency has weakened. Rising quotes mean a US dollar can now buy more of the other currency than before.
Majors not Based on the US Dollar
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). For these pairs, where USD is not the base currency, a rising quote means the US dollar is weakening and can buy less of the other currency than before.
In other words, if a currency quote goes higher, the base currency is getting stronger. A lower quote means the base currency is weakening.
Currency pairs that don't involve USD at all are called cross currencies, but the premise is the same as for the majors.
Bids, Asks and the Spread
Just like other markets, forex quotes consist of two sides, the bid and the ask:
- The BID is the price at which you can SELL base currency.
- The ASK is the price at which you can BUY base currency.
What's a Pip?
Forex prices are often so liquid, they're quoted in tiny increments called pips, or "percentage in point". A pip refers to the fourth decimal point out, or 1/100th of 1%.
For Japanese yen, pips refer to the second decimal point. This is the only exception among the major currencies