FOREX TRADERS

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Understanding the Price of Currencies: A Brief Note

The largest financial market in the world is the foreign exchange market. People from all over the world can take part in this market and earn huge amount of profits. If you are a newbie, it is important that you know the market very well first. Then you can take part in forex trading. In this information is taken from easyMarkets, some terms are described that will help you to understand the price of currencies. Read on.

1. Exchange rate
Exchange rate means the ratio of one currency valued against another. The first currency is known as the base currency, and the second currency is known as the quote or counter currency. If you choose to buy, it is the exchange rate that specifies how much you have to pay in the quote or counter currency, in order to obtain one unit of the base currency. While you choose to sell, it is the exchange rate that specifies how much you get in the quote or counter currency in order to sell one unit of the base currency.

2. Ask/Bid price
The ask price is always higher than the bid price. While selling one unit of the base currency, the bid indicates what will be obtained in the quote currency. In order to obtain one unit of the base currency, what has to be paid in the quote currency is indicated by the ask price.

3. Spread
The difference between the ‘ask’ and the ‘bid’ price is known as the spread. There are many currencies that are traded directly against the US Dollar. Direct rates are the market rates that are expressed for such currency pairs. There are many cases, where the US Dollar is the base currency pair and the quote currency is expressed as a definite or certain number of units per 1 US Dollar.

4. Indirect rates
There are some currency pairs, for which the US dollar is not base currency but the quote or counter currency. The market rates expressed for such type of currency pairs are known as indirect rates. This is the case with NZD (New Zealand Dollar), AUD (Australian Dollar), EUR (Eurodollar) and GBP (British Pound or “Cable”).

5. Cross rates
If one currency is traded against any other currency but not the USD, then the market rate for this currency pair will be called as a cross rate. The exchange rate between two currencies (not involving the US dollar), is known as cross rate. If you want to trade between two non-US dollar currencies, you can do that by first trading one against the US dollar, and after that, trading the US dollar against the second non-US dollar currency. Some examples of non-US dollar currencies, which are traded directly, are EUR/CHF or GBP/EUR.

In order to trade currencies, it is important that you understand their value, the exchange rates and several other things. This article will help you in that.