Before you take the plunge and trade in the exciting world of the Forex market, try to familiarize yourself with the basics of exchange rates and currency pairs so that you can fully understand Forex quotes. Once this is mastered, you can trade with more confidence on one of the many automated Forex trading system platforms. However, around-the-clock assistance is available on these Forex trading systems if questions arise.
If you read the financial section of any newspaper, you’ve probably seen the foreign exchange rate page. It lists foreign currency rates tied to your local currency. This grouping or “tying together” of two different rates is called the exchange rate or the rate of exchange between the two currencies. The currency pairs that are usually listed are called the “majors” – the US dollar (USD), euro (EUR), British pound (GBP), Japanese yen (JPY), and the Swiss franc (CHF). Other currencies that are listed but not considered one of the majors are the Canadian dollar (CAD), the Australian dollar (AUD), and the Hong Kong dollar (HKD).
Currency pair examples
The major currencies are usually paired up against the US dollar (USD). Currencies that are not linked with the US dollar are called cross currency pairs, and are usually traded on a Forex trading system as part of a portfolio diversification.
Here’s how it looks on a typical Forex trading system platform.
USD/JPY 103.94
EUR/USD 1.5593
USD/CHF 1.0347
In the first example, the USD is called the base currency. The base currency is always listed first and is equal to one. The second currency listed (i.e. JPY) is termed the quote currency, or how much the currency is worth against the base currency. With a rate of 103.94, the dollar is worth that amount against the yen. If you had $1000 dollars, you would have 103,940 yen in your pocket. Now, let’s say the dollar strengthens against the yen – the rate goes up to 104.40 (USD/JPY 104.40). That would mean that your $1000 would be worth more (104,400 yen). On the other hand, if the dollar weakens (i.e. USD/JPY 103.34), then your $1000 dollars would only be worth 103,340 yen.
Now that you’ve digested how currency pairs and price quotes work, you’ll be more confident in trading in the Forex market.