How to Read FOREX Quotes
Currency prices are determined by a
number of factors, the most important of which are economic and political
conditions in the issuing country.
Political stability, inflation, and
interest rates are all factored into the price of any currency. In addition,
governments can try to control the price of their currency by either flooding
the market (to lower the price) or buying extensively (to raise the price).
Because of the immense volume of
FOREX, however, it is impossible for one force to control the market for any
length of time. Market forces will prevail in the long run, making FOREX one of
the most open and fair investment opportunities available.
Each world currency is given a three
letter code which is used in FOREX quotes. The most common currencies are USD
(US dollars), EUR (European Euros), GBP (United Kingdom pounds), AUD (Australian
dollars), JPY (Japanese yen), CHF (Swiss francs) and CAD (Canadian dollars).
Prices of foreign exchange are
indicated by FOREX quotes in pairs of currencies. The first currency is the
'base' and the second is the 'quote' currency. In this example:
USD/EUR = 0.8419
...the currency pair is US dollars and
European Euros. The base currency (USD) is always at '1' and the quote currency
shows how much it costs to buy one unit of the base currency. In this example, 1
US dollar costs
0.8419 euros.
Conversely...
EUR/USD = 1.1882
...tells us that it costs 1.1882 US
dollars to buy 1 Euro. When the price of the quote currency goes up it indicates
that the base currency is becoming stronger – one unit of the base currency will
buy more of the quote currency. If the quote currency falls, however, the base
currency is becoming weaker.
FOREX quotes are seen in 'bid' and
'ask' prices. Bid is the price that buyers will pay for the base currency (while
selling the quote currency), and ask is the price that sellers will sell the
base currency (while buying the quote currency)
Symbol Bid Ask
USD/CAD 1.2392 1.2397
This chart tells us that we can buy
one American dollar for 1.2397 Canadian dollars, or sell one American dollar for
1.2392 Canadian dollars.
The most commonly traded currencies
pairs are the 'Majors' – GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and USD/CAD.
We often see exchange rates listed in
cross currency charts that list many different currencies and their values
against each other. An example of such a chart is seen bellow:
US $ Ca $ Euro UK £
US $1.00000 1.24060 0.83935 0.56870
Ca $ 0.80606 1.00000 0.67657 0.45841
Euro 1.19140 1.47805 1.00000 0.67755
UK £1.75840 2.18147 1.47591 1.00000
In this chart, the currencies listed
down the left side of the chart are the base currencies and the currencies at
the top are the quote currencies.
We can convert the chart above into
currency pairs by following the row beside the base currency. Using US dollars
as the base currency we get the following currency pairs:
USD/CAD = 1.24060
USD/EUR = 0.83935
USD/GBP = 0.56870
...which tells us that one US dollar
is equal to the corresponding value of the quote currency. To find the opposite
pair e.g. CAD/USD follow the Canadian dollar row to the US dollar column - CAD/USD
= 0.80606 (one Canadian dollar is worth 0.80606 US dollars).
There is no standard for
cross-currency charts – some have the base currency on the top and some have it
on the side. How to tell which is which? You need to know at least one pair of
currencies and which one of the pair is more valuable.
