In our last lesson we started the second module of our forex trading course with a lesson on how to set up a free real-time demo trading account so we can learn the logistics of trading forex in real-time without risking any money. In today’s lesson we are going to begin to learn the logistics of trading foreign exchange, with a discussion of how to read a currency quote.
The first thing we are going to do here is login to our demo trading account so if you have not registered for a demo yet please pause the video here and click register for a free demo at the link above this video if you are watching on InformedTrades.com or in the description section if you are watching on Youtube.
Once logged into the platform the first thing you are probably going to notice is the “Dealing Rates Window” which has a bunch of currency pairs listed and rates which are updating up and down. As you will also notice in this window each currency pair has two rates listed which are moving up and down together in tandem. This is what is known as the bid and ask quotes. For the purposes of this lesson we are going to look at only the ask or second quote for each currency pair as we are going to go over what the bid and ask is in a later lesson.
The first thing that it is important to understand about trading the forex market is that currencies are quoted in pairs. Another way of looking at this is that the value of a currency is always determined by comparing it with another currency.
So for example the first currency pair which you should see in your quotes window is EUR/USD or the Euro/US Dollar currency pair. As of this lesson as you can see in the quote window here the Euro Dollar currency pair is trading at right around 1.5700.
In the foreign exchange market the first currency in the pair is referred to as the “Base” currency and the second currency in the pair is referred to as the counter currency. So with this in mind the quote that you see here is how many of the second or counter currency it takes to buy 1 of the first currency in the pair.
In this example where we are looking at a quote for the EUR/USD of 1.5700 what this means is that it takes 1.5700 US Dollars to buy 1 euro.
Moving across the quote window to the right the next currency pair that we should see is USD/JPY or the US Dollar Japanese Yen currency pair. Notice that in this example the US Dollar is the base currency and the Japanse Yen is the counter currency. As of this lesson the USD/JPY currency pair is trading at 102.36.
So remembering that the currency quote shows how many of the counter currency in the pair it takes to buy 1 of the base currency we know that a quote of 102.36 for USD/JPY means that it currently takes 102.36 JPY to buy 1 USD.
As we discussed in our lesson on the main currencies of the world, the Euro, Yen, Pound, Swiss Franc, Australian Dollar, New Zealand Dollar, and Canadian Dollar are the most actively traded currencies in the world, and the ones that can be traded actively 24 hours a day as a result. As you can see in the quote window here they are all there quoted against the USD.
As you will also notice here however there are currency pairs which include two of these currencies and which do not include the US Dollar. An example here would be EUR/CHF. Currency pairs which do not include the US Dollar are referred to as cross currencies; however the quoting convention works exactly the same.
So as one final example here as of this lesson EUR/CHF is trading at 1.5921. From the above examples we know that this quote is how many of the counter currency it takes to buy one of the base currencies. So with this in mind we know that this quote means that it takes 1.5921 CHF to buy 1 EUR.
For tonight’s homework session I would like everyone to pick two currency pairs quickly and simply list what the current quote is and what that means as I have just done above. If you would like feel free to list it in the comments section just below this video. That’s our lesson for today.
In tomorrow’s lesson we are going to look at what it means when a quote for a particular currency pair increases and what it means when it decreases so we hope to see you in that lesson.
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Risk Disclosure: Trading forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.