So now that we have some basic understanding about forex, a potential investor might be considering doing business on the market. If that’s the case, it may help to be able to understand a forex quote.
Because forex deals with the exchange of two different types of currency, the quote price has to reflect the values of both currencies. To do this, one had to understand how to read a currency pair.
Quoting one currency on forex always gets done in relation to another currency form, like U.S. dollars to euros or Japanese yen to Indian rupees. Showing a pair allows the value of one currency form to be reflected through the other in a manner similar to comparing an apple to an orange on a table; they’re both pieces of fruit, but their differences can be seen clearly.
The forex quote for two currencies will look like this:
|USD/JPY = 106.24|
For this example, the forex currency pair is comparing the U.S. dollar to the Japanese yen.
Starting from the left, the currency listed before the slash mark is called the base currency, which always equals one unit. The currency after the slash is the quote currency, or the counter currency. This currency amount shows the current equivalent of the quote currency in comparison of the base currency. For this example, the currency pair states that one U.S. dollar (the one unit) is the equivalent of 106.24 in Japanese yen.
Seeing the paired currencies listed like this allows the broker/investor to understand the exchange rate between any two sets of currencies at a given time. Because the market continually changes, it becomes necessary to constantly compare and contrast the various currencies to understand the changing dynamics. This state of constant movement not only grants forex a constant state of change when the market is open, but also helps forex grow to sizeable levels.
Forex also encourages a broker/investor to make purchases in a variety of combinations. If the yen market is high, a broker might decide to buy yen using a currency that rates lower for maximum gain. And because the market constantly fluctuates, the broker has the option to get creative on how they want to buy and sell based on where a given currency rates in comparison to others at a given time. Using the dollar/yen example, that quoted price could change within the hour or, more dramatically, be completely reversed based on market variables. And because the forex market is so vast, those changes can be happening on an almost minute-by-minute basis.
While the possibilities do entice the imagination, the broker should keep in mind that any posiiion taken on a trade will always be based to the terms of the base currency. If the broker buys a pair, the purchase will be made at the base currency, and the same rule will apply to sales. Think of the paired currency quote in terms of buy/sell definitions: the broker will be buying the base currency and selling at the quote currency.