In our last lesson we started the second module of our forex trading course with a lesson on how to set up a free real-time demo trading account so we can learn the logistics of trading forex in real-time without risking any money. In today’s lesson we are going to begin to learn the logistics of trading foreign exchange, with a discussion of how to read a currency quote.
The first thing we are going to do here is login to our demo trading account so if you have not registered for a demo yet please pause the video here and click register for a free demo at the link above this video if you are watching on InformedTrades.com or in the description section if you are watching on Youtube.
Once logged into the platform the first thing you are probably going to notice is the “Dealing Rates Window” which has a bunch of currency pairs listed and rates which are updating up and down. As you will also notice in this window each currency pair has two rates listed which are moving up and down together in tandem. This is what is known as the bid and ask quotes. For the purposes of this lesson we are going to look at only the ask or second quote for each currency pair as we are going to go over what the bid and ask is in a later lesson.
The first thing that it is important to understand about trading the forex market is that currencies are quoted in pairs. Another way of looking at this is that the value of a currency is always determined by comparing it with another currency.
So for example the first currency pair which you should see in your quotes window is EUR/USD or the Euro/US Dollar currency pair. As of this lesson as you can see in the quote window here the Euro Dollar currency pair is trading at right around 1.5700.
In the foreign exchange market the first currency in the pair is referred to as the “Base” currency and the second currency in the pair is referred to as the counter currency. So with this in mind the quote that you see here is how many of the second or counter currency it takes to buy 1 of the first currency in the pair.
In this example where we are looking at a quote for the EUR/USD of 1.5700 what this means is that it takes 1.5700 US Dollars to buy 1 euro.
Moving across the quote window to the right the next currency pair that we should see is USD/JPY or the US Dollar Japanese Yen currency pair. Notice that in this example the US Dollar is the base currency and the Japanse Yen is the counter currency. As of this lesson the USD/JPY currency pair is trading at 102.36.
So remembering that the currency quote shows how many of the counter currency in the pair it takes to buy 1 of the base currency we know that a quote of 102.36 for USD/JPY means that it currently takes 102.36 JPY to buy 1 USD.
As we discussed in our lesson on the main currencies of the world, the Euro, Yen, Pound, Swiss Franc, Australian Dollar, New Zealand Dollar, and Canadian Dollar are the most actively traded currencies in the world, and the ones that can be traded actively 24 hours a day as a result. As you can see in the quote window here they are all there quoted against the USD.
As you will also notice here however there are currency pairs which include two of these currencies and which do not include the US Dollar. An example here would be EUR/CHF. Currency pairs which do not include the US Dollar are referred to as cross currencies; however the quoting convention works exactly the same.
So as one final example here as of this lesson EUR/CHF is trading at 1.5921. From the above examples we know that this quote is how many of the counter currency it takes to buy one of the base currencies. So with this in mind we know that this quote means that it takes 1.5921 CHF to buy 1 EUR.
For tonight’s homework session I would like everyone to pick two currency pairs quickly and simply list what the current quote is and what that means as I have just done above. If you would like feel free to list it in the comments section just below this video. That’s our lesson for today.
In tomorrow’s lesson we are going to look at what it means when a quote for a particular currency pair increases and what it means when it decreases so we hope to see you in that lesson.
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WEEKLY Forex Economic Calendar: 24 Feb Fri
13:30 CA- CPI
15:00 US- New Homes Sales
15:00 US- final Univ of Mich Survey
13 Feb Mon
No Major Data 27 Feb Mon
13:30 US- Durable Goods 28 Feb Tues
07:00 DE- Retail Sales
10:00 EZ- flash HICP
13:30 US- GDP
15:00 US- CB Consumer Confidence
15:30 US- EIA Crude 1 Mar Wed
All Day- final Mfg PMIs
08:55 DE- Jobless
13:30 US- PCE Deflator
15:00 CA- Bank of Canada Decision
15:30 US- EIA Crude
19:00 US- Beige Book 2 Mar Thu
13:30 US- Weekly Jobless
23:30 JP- CPI 3 Mar Fri
All-Day SVC PMIs
Markets are heading into the weekend with a risk-off posture. Worries about European elections over the next several weeks appear to be fading for the moment. On the other hand, all the hysteria about the Trump Presidency has begun to abate. The new administration is starting to learn that the U.S. political system with its checcks and balances is designed constitutionally to be slow to change.
Some have been pushing the date for a Fed rate hike back to May. I don't see much of asentiment shift in Fed Funds futures. I still feel the Fed hikes in March barring a significantly weaker than expected February jobs report on March 10. The FOMC Minutes left open the door to the RISK of a Rate hike as early as the March 15 FOMC ("fairly soon"). No clear signal was sent. The Fed would like to embark on a policy "normalization". Some have trouble believing they have the courage to go through with a rate hike. For Yellen to build market credibility, she should hike rates soon. Fed Funds futures odds for a March Fed rate hike are only 38% (34%), suggesting they are skeptical. Markets now place the odds for rate hikes by June at 112% (116%).
On top of the Fed muddle, investors have begun to worry about the risk from key leadership elections in Europe over the rest of the year. Many worry about the possibility of a swing to right as has been seen in the U.K. (Brexit) and U.S. (Trump). Such could be a challenge to the status quo in the EU.
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