Online Forex Trading Market Overview

Currency Description

The world's currencies are on a floating exchange rate and are always traded and quoted in pairs.  The most often traded currencies are those of countries with relatively stable governments, respected central banks, and low inflation.  The major currencies in today’s market are - US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar.

The first listed currency is known as the base currency (With a value of 1), while the second is called the counter or quote currency; If a trader buys a EUR/USD position for example, he/she has bought the base currency, EURO and simultaneously sold USD, believing that the base currency in this case, EURO, will increase in value.  (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 they are valued the same.  Currency pairs are quoted either Direct (GBPUSD, EURUSD, AUDUSD, NZDUSD), Inverse (USDJPY, USDCHF, USDCAD, USDZAR) or Cross (EURGBP, EURJPY, EURCHF, GBPCHF, GBPJPY, CHFJPY) rate terms.  

A forex quote will include a “Bid / Ask” spread; the 'bid' is the price at which you can sell the base currency (At the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (At the same time selling the counter currency).

The calculation of the value of a single PIP (The movement unit of a currency pair), a trader will utilize the following methods:

• For a Direct Quote, the PIP Value = Lot Size X Tick Size, where Tick size is the smallest possible change in price.
• For an Inverse Quoted currency pair, the PIP Value = (Lot Size X Tick Size) / Current Quote
• For Cross Quotes, the PIP Value = (Lot Size X Tick Size X Base Quote) / Current Quote where the Base Quote is the current Base Pair quote.

Exchange rate quotes are given as five digit numerals.  For example, USDJPY = 108.25 signifies that US$1 equates to 108.25 Yen, and EURUSD = 1.2525 signifies that 1 EURO equates to US$1.2525.

For a quote expressed as AAABBB = C, 1 Unit of AAA = C Units of BBB.

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