In our last lesson we learned how to read a currency quote. In today's lesson we are going to continue our discussion on the logistics of trading forex with a look at what an increase or decrease in a currency quote means to us as traders.
Now that we understand how to read a currency quote the next thing that it is important to understand is what an increase or decrease in the quote for a particular currency pair tells us about the value of the currencies which make up that pair. As we discussed in our last lesson, currencies are quoted in pairs or in terms of how much one currency is worth in terms of another currency. When we read a currency quote what we are seeing is how much of the second or counter currency in the pair it takes to buy one of the first or base currency in the pair.
With this in mind if the quote for a particular currency pair increases this means that it now takes more of the counter currency to buy 1 of the base currency. Another way of looking at this is that when the quote for a particular currency pair increases this means that the first or base currency in the pair has strengthened and the second or counter currency in the pair has weakened.
Conversely, when the quote for a particular currency pair decreases this means that it now takes less of the counter currency to buy 1 of the base currency. Another way of looking at this is that when the quote for a particular currency pair decreases this means that the first or base currency in the pair has weakened and the second or counter currency in the pair has strengthened.
Although a simple concept, this is one of the most confusing aspects of trading foreign exchange and something that people still mix up even after years of following the market. From my own experience the best way to think of things is simply that if the rate is increasing this means that the base currency is strengthening which automatically means that the counter currency is weakening. Conversely if the rate is decreasing this means that the base currency is weakening, which automatically means that the counter currency is strengthening.
To help solidify our understanding of forex quote movements lets login to our demo trading platforms and look at a few different currencies pairs on a price chart. If you have not done so already I encourage you to pause this video now and register for a free demo trading account by clicking the link above this video if you are watching on InformedTrades.com or in the description section of this video if you are watching on YouTube.
After logging into your real time demo trading account you should see a button in the upper right hand corner of the trading station that looks like a yellow clock circle and says create market shot over it. Select that button which should bring up a chart preferences window. Select 5 minute there for the timeframe and then click create market shot.
After doing this you should see get a realtime 5 minute chart of the EUR/USD. Lets take the example on this chart of earlier today when the market for the EUR/USD went from xxx to xxx. From the above we should now no that this increase in price means that the EUR has strengthened against the USD during this time period. Conversely if we look at the time period from xxxx to xxxx we can see a decline in price from xxx to xxx. We should now also know that this means that the EUR has weakened against the USD in this example.
The important thing to remember here is that if the price is going up in the quotes window and therefore the chart this means that the base currency is getting stronger and the counter currency is getting weaker. If the price in the chart is going down this means that that the base currency is getting weaker and the counter currency is getting stronger.
Next lets switch the chart to a 5 minute chart of the USD/JPY currency pair. Here we can see that the price for the USD/JPY currency pair has decreased from xxxx to xxxx. As the USD is the base currency in this case this means that the USD has weakened in relation to the JPY. Conversely we can also see that from xxxx to xxx the rate for the USD/JPY currency pair has increased which means that the USD has gotten stronger and the JPY has gotten weaker.
That's our lesson for today. In tomorrow’s lesson we are going to learn about the bid and ask quotes and something which is known as the spread 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.