Before trading foreign exchange market, an investor has to understand the basic terminology of the forex market, including how to interpret forex quotes. In every foreign exchange transaction an investor is simultaneously buying one currency and selling another. These two currencies make up a currency pair. This is an example of a foreign currency exchange rate of the dollar versus the yen:
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The currency on the left is called the “base currency” (the US dollar) and the one on the right is called the “quote currency” or “counter currency” (the Japanese Yen). This notation means that 1 unit of the base currency (US$1 is equal to 119.72 Japanese Yen).
If buying, the exchange rate specifies how much you have to pay in units of the quote currency to buy one unit of the base currency. In this example, you have to pay 119.80 yen to buy US$1.
If selling, exchange rate specifies how much units of the quote currency you get for selling one unit of the base currency. In the this example, you will receive 119.72 Japanese Yen when you sell US$1 |
The bid price is the price at which the dealer is willing to buy the base currency Thus, if a client presses the button "Sell”, he/she would sell US Dollar at 119.72 yen. The ask price, on the other hand, is the price at which the dealer is willing to sell the base currency. By clicking "Buy" the client would be buying US Dollars at 119.80 yen.
Even though there are many currencies all over the world, 85% of all daily transactions involve trading a group of currencies known as the "Majors". These currencies include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. The four most actively traded currency pairs are the US Dollar / Japanese Yen (USD/JPY), Euro / US Dollar (EUR/USD), British Pound / US Dollar (GBP/USD), and the US Dollar / Swiss Franc (USD/CHF). For traders, the best trading opportunities are with the most commonly and actively traded currencies, which are the “Majors”.
Look at the below examples, from left to right are the Euro / US Dollar, the British Pound / US Dollar, and the US Dollar / Swiss Franc exchange rates. All of these currency quotes are of major currency pairs.
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Taking the example of the Euro / US Dollar quote, buying one Euro would cost 1.0099 US dollars and selling would get 1.0091 US dollars.
Taking the example of the GBP / US Dollar quote, buying one British Pound would cost 1.5877 US dollar and selling would get 1.5869 US dollars.
Lastly, the example of the US Dollar / CHF quote, buying one US dollar would cost 1.4481 Swiss Franc and selling would get 1.4489 Swiss Franc.
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