Investors that are new to the foreign currency exchange market, or the Forex market, can be easily confused with the different currency offerings. This can even be more confusing when you try to evaluate one set of currencies against another. This post will help you start training your mind to read the Forex charts and understand the quotations of the Forex market.
The first thing you need to understand is that the Forex market quotations are always presented in terms of currency pairs. These two currencies display a number of how they are priced against each other.
Here is an example of one of the most common currency pairs, the Euro and the U.S. Dollar. A common quotation would look like: EUR/USD = 1.2034
So, what is this telling us? The best way to think about it is that the quotation is telling you how many of the second currency you will need to spend in order to buy 1 unit of the first currency. If you take the above example and state it in this way, it would be, "I need 1.2034 US Dollars in order to buy 1 Euro". Simple, right?
What happens if, at another time, you see a quotation like EUR/USD = 1.1653 ? Using the same tip from above, you could say, "I need 1.1653 US Dollars in order to buy 1 Euro". In effect, this means that you now have to spend fewer Dollars to obtain the same number of Euros. Think about that for a second . . . even though the quotation you see in the newspaper is actually lower, you could still say, "The US Dollar has strengthened against the Euro". It has strengthened because your Dollars now buy more Euros than you could previously.
The reverse is also true. If you see a quotation like EUR/USD = 1.3189 you now need more U.S. Dollars to buy the same number of Euros (1 Euro). You could now say, "The US Dollar has weakend against the Euro". This means that your trip to Paris just became more expensive because you will have to spend more Dollars to obtain the Euros you need.
The most common question people ask at this point is, "What's the quotation for the USD/EUR?". Even thought the number exists, it's an inverse of the previous numbers, you should realize that there are standardized ways of quoting Forex prices. So, while you can compute the number, stick with pairs like the EUR/USD and the other major pairs and the order in which they are quoted.
Here's something else to think about. It's much easier to think about strengthening and weakening currencies rather than to think about charts and graphs like you would with most stocks. This is because the currency pairs are presented in different ways. Take the following two quotations for a Monday and Tuesday:
MONDAY
EUR/USD = 1.2644
USD/CAD = 1.4932
TUESDAY
EUR/USD = 1.3117
USD/CAD = 1.3878
We already know from our first example of working with the EUR/USD that the US Dollar has weakened against the Euro because we now have to spend more Dollars for 1 Euro. But in the second example, the USD/CAD, this is an example of how many Canadian Dollars you need to buy 1 US Dollar. If you were to chart out the EUR/USD, it would be an ascending line but if you were to chart out the USD/CAD, it would be a descending line. But in both cases, in spite of the graph lines, the US Dollar has actually weakened. You now need more US Dollars to buy the same 1 Euro and it is now cheaper for the Canadian Dollar to buy 1 US Dollar.
Bottom line - when looking at the Forex quotes, it's crucial to pay attention to the order in which the pair is being quoted and understand what the numbers are telling you.
Bottom line - when looking at the Forex quotes, it's crucial to pay attention to the order in which the pair is being quoted and understand what the numbers are telling you.
