When we buy goods in a shop , the price tag on the product reflects the value of the goods in terms of the national currency. And we have no questions , if we are going to buy the book at the cost of $ 100 – we take a book and prepare the $ 100 and go to the checkout .
Forex trading one currency is always relative to the other currencies , so the price tag is not simple enough. Suppose we are dealing with the U.S. dollar and the Euro . To assess the value of currencies , we need to know the value of one U.S. dollar expressed in Euro or Euro value , expressed in U.S. dollars. That is, we need to know the exchange rate of one currency against another. This exchange rate is reflected quotation form A / B. In our case, with the Euro and the U.S. dollar quotation looks like EUR / USD.
Currency, which is the sign “/” is called the base currency (base currency), and the currency that is worth following the sign “/” is called the quote currency . For any pair of currencies in Forex currency position in the quotation is strictly defined . For the euro and the U.S. dollar , it looks exactly like EUR / USD, and never presented as USD / EUR in the official lists of quotations. Thus , EUR – the base currency and the USD – quote currency .
What determines the position of currency in the quote ? Let’s digress for a while and consider the Forex single country , such as Japan. Each country has historically developed their own rules for writing the exchange rates for each foreign currency. These rules are explained by the recording , usually only the convenience of presenting information. Agree, because it is more convenient to say that the U.S. dollar can buy or sell for 104.78 Japanese yen than to say that one Japanese Yen can be bought or sold for 0.0095 U.S. dollars. That is why the exchange rate of the Japanese yen against the U.S. dollar appears to quote USD / JPY, and not vice versa. A method of recording the exchange rate at which the cost per unit of foreign currency expressed in terms of a certain number of units of the national currency is called a direct quotation . Method of recording the same exchange rate at which the cost per unit of domestic currency expressed in terms of a fixed amount of foreign currency is called a direct quote . In our example, the USD / JPY – direct quotation for Japan.
Currency rates on Forex
Since the Forex has no concept of the national currency , and the main global reserve currency is the U.S. dollar, to refer to the U.S. dollar quotations used the rules for writing exchange rates prevailing in the countries of Compliance . The concepts of direct and indirect quote on Forex are used in relation to the U.S. dollar. With some currency pairs the U.S. dollar will be the base currency and the quote will be back . With some currency pairs the U.S. dollar will be the quote currency and the quote will be a straight line. For example , paired with the Japanese Yen (USD / JPY) U.S. dollar functional currency stands in direct quote , and paired with the British pound sterling (GBP / USD) – the quote currency in direct quotation .
When we say that a quote A / B is equal to X, we mean that one unit of the base currency A can be bought or sold for X units of the quote currency B. In our example, with the Euro and the U.S. dollar , if we say that the quotation EUR / USD is 1.2845 , we mean that one Euro , we may buy or sell for 1.2845 U.S. dollars. In other words, the transactions of purchase / sale always refer to the base currency .
From the table it can be concluded that one Euro is sold / bought 1.2845 per U.S. dollar, the U.S. dollar sold / bought for 97.50 Japanese Yen, etc.
It is important to know that in some lists of quotations on the Internet focus on the forward / reverse quotation is not done and it is intended that the user is knowledgeable , understanding what in the quote currency is the base currency. For example, on the Internet you can find a quotation, written as JPY / USD 97.50, when in fact meant reciprocal rate against the U.S. dollar, that is, USD / JPY 97.50. Sometimes quotations against the U.S. dollar indicated only one currency , such as JPY 97.50. Therefore , it is important to learn a couple of quotes that you are going to use in the Forex and know what quotation ( forward or reverse ), it is in relation to the U.S. dollar , it is necessary to know the base quotes in pairs! Otherwise, you may mistake the diametrically opposite decision of purchase / sale. This is especially true in relation to the Swiss franc (CHF), which is paired with the U.S. dollar is always the quote currency . That is a record like CHF 1.1623 means that one U.S. dollar is sold / bought for 1.1623 Swiss francs , and not vice versa.
In addition to understanding the quotes themselves is very important to understand the direction of change in prices. After all, our main goal is to work on Forex – is, as in any transaction, buy cheap and sell expensive . For forward and reverse direction of changes in exchange quotes are opposite values . For direct quotations against the U.S. dollar, such as GBP / USD, an increase in quotes means the rise of the pound sterling and the depreciation of the U.S. dollar , because one pound is now possible to buy / sell for more dollars. And for indirect quote in relation to the U.S. dollar , such as USD / JPY, increase quote means the rise of the U.S. dollar and the depreciation of the Japanese yen , after the U.S. dollar can now buy / sell for a greater number of Japanese Yen . That is why it is important not to confuse the type of quotes in relation to interest in the commission of currency operations on Forex . This principle is shown in the figure represents a simplified graphs of prices.
Minimal change quotation value is called point and for different quotes , it is different. For example, to quote EUR / USD One point is equal to 0.0001 , and for the quotation USD / JPY one point is equal to 0.01 . It should be noted that senior figures quotes (big figure) tend to change very slowly over time.
Of great interest is the value of one point , expressed in U.S. dollars. In cases of direct quotes in relation to the U.S. dollar is not a problem , since the point is expressed in U.S. dollars. In the case of the inverse of the U.S. dollar value of one point of the quotations in U.S. dollars must be calculated according to a special formula , which will be discussed later, when we will learn to calculate the profit / loss from the transaction .