Basics of Currency Trading
We trade currencies in pairs, because we are treating one of the currencies as an item that we are buying.
When you go to a grocery store in America, you pay US dollars to buy a pack of popcorn, right?
When you go to a forex party, lets say to the EUR/USD party, you basically want to buy Euro as oppose to that bag of popcorn. And guess what, you have to pay US dollars for it!!
To make the procedure of pricing easier, in the forex industry each of the currency items on a forex party shelf are labeled by the type of money you can pay to buy that currency.
That’s right, you are paying dollars (money) to buy another type of money!
Why Currency Pairs are Ordered a Particular Way
You may have noticed that in each party, when calling up a currency pair, one currency is quoted first, and the other is quoted second. For example, in USD/JPY, Ms. United Stated comes first, followed by Mr. Japan. In EUR/USD, Mr. Europe comes first followed by Ms. United States. This pattern is fixed and doesn’t change.
Now, this has nothing to do with whether or not the country of a currency is culturally expected to let ladies go first. In fact, in Japan for example, it is exactly the opposite. In real life, men are expected to enter first to make sure everything is safe.
The first currency in the pair is called the base currency and the second is called the quote currency. As the base and quote come together, the currency pair shows how much of the quote currency is needed to purchase one unit of the base currency. We will talk more about this in your next coffee break.
How to Calculate the Price of a Currency Pair
The next thing you pay attention to after picking an item to buy at a grocery store, is its price. Same thing happens when you attend a forex party and pick a currency pair. You want to know how much each pair is worth. In other words their price shows their movements on the dance floor!Every move that an international currency pair makes at a party, is showed in numbers. It doesn’t take a genius to figure out that the number, is the price of the pair. Don’t worry, we are certainly not in the business of trading women. You are still learning how to trade currencies. We are simply trying to show you how exchange rates work.
Okay, let’s get to business. Take a look at the following geeky statement announced by a currency analyst (me):
“EUR/USD is trading at 1.3125.”
What does it tell us? It says that 1 Euro can buy about 1.31 US dollars. Meaning we would have to pay 131 US dollars to buy 100 Euros.
Now, take a look at this:
“USD/JPY is trading at 88.34.”
This is saying that 1 dollar can buy about 88 units of the Japanese currency.
How do you read the price of this apple in a grocery store?
You would probably say:
One apple is 1.50 dollars.
The simple logic behind this, is filling in the brackets in the sentence below:
One [object] is [price] [currency]
The same thing happens in buying currencies. The only difference is that in forex trading, you are not buying an object with your dollars or whatever currency that you have. You are buying another currency.
In order to easily read the prices, you can remember this phrase, fill in the brackets, and pretend that you are a psychic who can read the hands of any currency pair. In the magical formula above, just replace [object] with [first quoted currency].
One [object] is [price] [currency]
One [1st currency] is [price] [2nd currency]
So when you see:
EUR/USD = 1.3125,
it is exactly as if we write:
Fill in the brackets:
One [apple] is [1.50] [dollars]
One [Euro] is [1.3125] [dollars]
One euro is 1.3125 dollars.
That’s it. The secret is out. Now you can easily impress your date by bringing up a currency chart on your mobile phone web browser, and show him/her how to read the currency pairs: Not only I am sexy, but also I’m smart, and I know it.
Just to spice it up, don’t be afraid to have LMAO’s “I’m sexy and I know it” on the background