Forex Articels

 

Forex related terms

CURRENCY PAIR… EVERYTHING YOU NEED TO KNOW BUT WHERE ALWAYS AFRAID TO ASK

Let’s begin with some important terms. Then, we’ll move on to larger issues…

* The value of a currency is always determined in terms of another currency’s value. This is to say, that currencies are stated in pairs, and values against each other. Currencies are not only stated in pairs, but also traded in pairs.

* A “Base Currency” is one currency in a currency pair. In a quote it will appear first and it is the currency with which other currencies’ values are quoted in a pair.

* Quote is an indicative market price, normally used for information purposes only and not for deals.

* The Bid Price is displayed on the left in a currency pair. It is the price at which traders can sell the base currency.

* Offer Price is the price displayed on the right in a currency pair. It is the price at which traders can buy the base currency.

* “Spread” refers to the difference between the bid and the offer prices for a currency pair.

* Pips (a.k.a., Points) is one unit of price change in the bid/ask price of a currency. It is the last digit in a rate; the fourth decimal place in an exchange rate.

* “Cross Rate” is the exchange rate between any two currencies that are not of the country in which the currency pair is quoted. For example, in the U.S., a GBP/JPY quote would be considered a Cross Rate. The same quote would not be a Cross Rate in either the U.K. or Japan.

Last but not least:

* Major currencies change frequently but currently “major currencies” refers to the EUR (Euro), the GBP (Great Britain Pound), the JPY (Japanese Yen), and the USD (Unites States Dollar). The EUR has replaced the German Mark and the French Franc that were previously part of the “major currencies”.

One of the most important concepts in Forex trading is currency pair. In order to understand Forex trading, you must understand which currency is which, which currency you are selling, which you are buying, and what the transactions means.

Important Steps to Understand:

* Each currency has a three-letter code. (For example, the U.S. Dollar is referred to as USD).

*Always remember that the first currency listed in a pair is the "base currency." (For example, in the quote: USD/JPY 2.34, the USD is the base currency).

*Assuming the base currency is the USD, you will pit it against another currency. (As in the example above, you pit the USD against the, JPY, the Japanese Yen.)

* A quote of USD/JPY 2.34 means that one USD is equal to 2.34 JPY (i.e. the second currency is expressed via the price of the first currency).

* If by the end of the determined time the quote will show USD/JPY 2.50, then the value of the dollar has increased. This, of course, means that the value of the other currency has decreased.

* Think about it this way: while with one USD you could have initially bought 2.34 JPY, you can now buy 2.50 JPY with it. Since the same amount (1 USD) gets you more than it initially did, it is clear that its value has increased.

Always remember: A higher currency quote means that the value of the base currency has strengthened. A lower quote means the base currency has weakened.