Forex Trading Education

Exchange Rates in Forex Trading Education

In finance, the exchange rate (also known as the foreign-exchange rate, Forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example a Forex Trading exchange rate of 120 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 120 is worth the same as USD 1. The Forex Trading market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.

The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.

Quotations in Forex Trading Education

An exchange rate quotation is given by stating the number of units of a price currency that can be bought in terms of 1 unit currency. For example, in a Forex Trading quotation that says the EUR-USD exchange rate is 1.2 USD per EUR, the price currency is USD and the unit currency is EUR.

A good thing for a Forex Trader to know about Forex Trading is this: Quotes using a country’s home currency as the price currency (e.g., £0.574744 = $1 in the UK) are known as direct quotation or price quotation (from that country’s perspective) ([1]) and are used by most countries.

Another good thing to know about Forex Trading is quotes using a country’s home currency as the unit currency (e.g., $1.73990 = £1 in the UK) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and Canada.

Direct quotation: Home Currency / Foreign Currency

Indirect quotation: Foreign Currency / Home Currency

In other words, there are two way for quoting currencies. Note that, using direct quotation, if a unit currency is strengthening (i.e., appreciating, or becoming more valuable) then the Forex Trading exchange rate number increases. Conversely if the price currency is strengthening, the exchange rate number decreases and the unit currency is depreciating.

Keep in mind while Forex Trading that when looking at a currency pair such as EUR/USD, many times the first component (EUR in this case) will be called the base currency. The second is called the counter currency.