We have all seen FX Quote before.
All financial TV stations are showing FX rates with their commentary all the time.
Let us try a vivisection of EURO quote. EURO is short for EUR/USD.
EUR/USD is a pair (not a very good couple really, as they do not like each other too much).Every FX pair is built as follows:
Base Currency / Quote Currency.
Base currency determines the units of the FX contract and its contract value.
So next time you hear somebody sold 2 million EUR/USD you will know he exchanged
2 million EUR for equivalent in USD. He sold EUR to the counterparty and bought USD from them.
Quote Currency determines the value of Mr. Pip.
In EUR/USD case Mr. Pip is denominated in American Dollars.
GBP/USD trading at 1.5540? You can hear them saying that Cable is trading at fifty five forty! That’s the same thing. One can skip first number from the quote and say only what is after the dot.This means one British Pound is worth not more than one dollar and fifty five and four-tenths cents!
USD/JPY trading at 102.00 spot? One needs to give 102 Yen for one US Dollar! Is it expensive? Many thought it was. Now they know better ;)
So what if EUR/USD is trading at 1.1020? What does it mean?
This means that the current price of EURO is one dollar ten and two-tenths cents! That simple.
Now let’s see what we can do with EUR/USD in FX market.
We can either BUY it or SELL it.
Ok, we can also leave it alone and do nothing. Sometimes it is the only right thing to do, but we will get to this later.
When we BUY EUR/USD we are betting for the Euro getting stronger against USD. We buy Euros and sell Dollars.
When we SELL EUR/USD we assume that Euro will weaken against Dollar, so we sell Euros and Buy Dollars.
How much money we make/lose when the FX pair moves up or down by 1 Pip or 1 percent we explain in the next post.