The price of a currency is determined by a variety of different factors perhaps the most important of which are political and economic conditions in the country issuing the currency. Currency prices will, for example, be influenced by such things as a country's political stability, its rate of inflation and its interest rates. Governments can also directly influence currency prices by either issuing currency to lower prices or by buying currency to raise prices.
One of the greatest strengths of the Forex market however lies in its sheer size which means that, while governments can influence prices in the short-term, in the longer term the market will invariably prevail. This makes Forex trading both an extremely fair and also a very open form of investment.
Forex quotes use a three letter country code for each currency being traded with the most commonly traded currencies being the US dollar (USD), European euro (EUR), United Kingdom pound (GBP), Australian dollar (AUD), Japanese yen (JPY), Canadian dollar (CAD) and Swiss franc (CHF).
Forex quotes are issued for currency pairs with the first currency in the quote being known as the "base" currency and the second as the "quote" currency. Here is an example of a quote for the US dollar and European euro:
USD/EUR = 0.8723
The base currency (the US dollar) is always taken to be "1" unit in the quote and the quote shows how much it will cost to buy one unit of the base currency. Here therefore it will cost 0.8723 European euros to buy 1 US dollar.
This quote could also have been given as:
EUR/USD = 1.1464
Here it will cost 1.1464 US dollars to buy 1 European euro.
When reading Forex quotes it's common to watch the price of the quote currency as it rises and falls. An increase in the quote currency indicates that the base currency is becoming stronger and that one unit of the base currency will now buy more of the quote currency. Similarly, if the quote currency falls, then the base currency is becoming weaker.
When buying and selling currencies, Forex traders are interested in both the "bid" and the "ask" price for each currency. The bid price is the price (in the quote currency) that the buyer pays for the base currency, while the ask price is the price (in the quote currency) at which the sellers will sell the base currency.
Symbol Bid Ask USD/CAD 1.2402 1.2407
This quote indicates that we can buy one US dollar for 1.2407 Canadian dollars, or sell one US dollar for 1.2402 Canadian dollars. If this is confusing, remember that when reading this quote it is the dealer and not you who is the buyer/seller.
The most frequently traded currency pairs are what are termed the "Majors" and are the GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and USD/CAD.
Of course, as dealing is normally conducted across a range of currency pairs, it is common to see quotes combined into a chart as follows:
US $ Ca $ Euro UK £
US $ 1.00000 1.24060 0.83935 0.56870
Ca $ 0.80606 1.00000 0.67657 0.45841
Euro 1.19140 1.47805 1.00000 0.67755
UK £ 1.75840 2.18147 1.47591 1.00000
Here, the currencies shown on the left side of the chart are the base currencies and the currencies along the top are the quote currencies. From this chart we can derive the currency pairs by following the row for each base currency. Using the UK pound as the base currency we get the following currency pairs:
GBP/USD = 1.75840
GBP/CAD = 2.18147
GBP/EUR = 1.47591
One important point to note is that there is no standard format for multiple currency charts and you will sometimes find charts with the base currencies running along the top, rather than down the left-hand side. The only way to know which form of chart you are looking at is to recognize at least one quote. In the example above we know from experience that 1 UK pound will buy more than 1 US dollar and so it is clear that the base currencies here are running down the left-hand side.
By : David Shephard - http://forexonlinetradingsystem.info/
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