Forex Basics

Most individuals find reading a foreign exchange quote somewhat confusing at first. However, it's really quite easy if you keep in mind two simple forex basics facts:

• The first currency listed first is called the base currency; and

• the value of the base currency is always 1.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency - at the same time buying the counter currency. The 'offer' is the price at which you can buy the base currency - at the same time selling the counter currency.

When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value against that currency and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 117.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.6988, meaning that one British pound equals 1.6988 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar. In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 129.75 signifies that one Euro is equal to 129.75 Japanese yen.

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