David Waring

In our last lesson we learned how to read a currency quote. In today's lesson we are going to continue our discussion on the logistics of trading forex with a look at what an increase or decrease in a currency quote means to us as traders.

Now that we understand how to read a currency quote the next thing that it is important to understand is what an increase or decrease in the quote for a particular currency pair tells us about the value of the currencies which make up that pair. As we discussed in our last lesson, currencies are quoted in pairs or in terms of how much one currency is worth in terms of another currency. When we read a currency quote what we are seeing is how much of the second or counter currency in the pair it takes to buy one of the first or base currency in the pair.

With this in mind if the quote for a particular currency pair increases this means that it now takes more of the counter currency to buy 1 of the base currency. Another way of looking at this is that when the quote for a particular currency pair increases this means that the first or base currency in the pair has strengthened and the second or counter currency in the pair has weakened.

Conversely, when the quote for a particular currency pair decreases this means that it now takes less of the counter currency to buy 1 of the base currency. Another way of looking at this is that when the quote for a particular currency pair decreases this means that the first or base currency in the pair has weakened and the second or counter currency in the pair has strengthened.

Although a simple concept, this is one of the most confusing aspects of trading foreign exchange and something that people still mix up even after years of following the market. From my own experience the best way to think of things is simply that if the rate is increasing this means that the base currency is strengthening which automatically means that the counter currency is weakening. Conversely if the rate is decreasing this means that the base currency is weakening, which automatically means that the counter currency is strengthening.

To help solidify our understanding of forex quote movements lets login to our demo trading platforms and look at a few different currencies pairs on a price chart. If you have not done so already I encourage you to pause this video now and register for a free demo trading account by clicking the link above this video if you are watching on InformedTrades.com or in the description section of this video if you are watching on YouTube.

After logging into your real time demo trading account you should see a button in the upper right hand corner of the trading station that looks like a yellow clock circle and says create market shot over it. Select that button which should bring up a chart preferences window. Select 5 minute there for the timeframe and then click create market shot.

After doing this you should get a realtime 5 minute chart of the EUR/USD. Lets take the example on this chart of earlier today when the market for the EUR/USD increased in price. From the above we should now no that this increase in price means that the EUR has strengthened against the USD during this time period. Conversely if we look at the chart we can see a decline in price. We should now also know that this means that the EUR has weakened against the USD in this example.

The important thing to remember here is that if the price is going up in the quotes window and therefore the chart this means that the base currency is getting stronger and the counter currency is getting weaker. If the price in the chart is going down this means that that the base currency is getting weaker and the counter currency is getting stronger.

Next lets switch the chart to a 5 minute chart of the USD/JPY currency pair. Here we can see that the price for the USD/JPY currency pair has decreased. As the USD is the base currency in this case this means that the USD has weakened in relation to the JPY. Conversely we can also see that the rate for the USD/JPY currency pair has increased which means that the USD has gotten stronger and the JPY has gotten weaker.

That's our lesson for today. In tomorrow’s lesson we are going to learn about the bid and ask quotes and something which is known as the spread so we hope to see you in that lesson. As always if you have any questions or comments please post them in the comments section below, and good luck with your trading!

canif_rajiv

not able to activate FXCM real-time streaming prices into the FXCM Trading Station.
let me know which button to activate ????????????
thanks
i have been following all ur earlier
great...very methodical

regards
rajiv

Tekmnd

hi rajiv

The FXCM trading station does not work between Fri afternoon and Sunday afternoon New York time.

Cheers
Tek

canif_rajiv

Dear Tek

thnks. fot the info

rajiv

iridium

Lets take the example on this chart of earlier today when the market for the EUR/USD went from xxx to xxx. From the above we should now no that this increase in price means that the EUR has strengthened against the USD during this time period. Conversely if we look at the time period from xxxx to xxxx we can see a decline in price from xxx to xxx. We should now also know that this means that the EUR has weakened against the USD in this example.

OK got a question plus one.
In your example above highlighted blue shouldn't it be " from xxx to xxx+n or xxx to xxx-n; n= positive integer...?

Also in case of EUR/USD or any other currency pair you claim,, ... that if cross currency decreases/increases in value than base currency will increase/decrease in value.
If this is true than converse should be true..... If base currency decreases/increases in value than cross currency increases/decreases in value.
Or am I getting wrong ?

Iridium iridium4x@yahoo.com

David Waring

Hi Iridium,

Leaving the xx's in was a mistake on my part so yes you are correct that it should be written as you have stated, thanks for pointing that out.


yes you are correct here as well.

Let me know if there are any other questions.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

TradingPlaces

Hey Dave
I just signed into my DEMO account with fxcm. My page looks nothing like yours.. I don't have a yellow clock or even a option for marketshot. I'm on a mac computer does that make a difference? I'm only able to download a JAVA TRADING STATION. What should I do?
Thanks

David Waring

Hey Tradingplaces,

Glad to hear from you.

Yes the Java station for Mac is going to look different than the trading station for windows which is what I am using in my videos.

I have not personally used the java trading station however I would imagine that the functionality in terms of order placement etc is very similar to what I outline in my videos. In terms of charts if they do not include charts then you should be able to use the free realtime charts at the link below:

Forex chart | Currency chart - free

Hope that helps.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Val

Hi, David.
I am confused.
Now, let's take the EUR/USD pair. If the rate for the pair is going down, for example, would that mean that the base or the Euro is getting cheaper in relation to the US dollar, it is weakening and therefore we should short it or sell?
Does it also mean that we are simultaneously buying the US dollar?
Also, when we buy/sell in the market window, does that refer only to the base currency?
Confused but fascinated
Vlad

Tekmnd

Hi Val

"If the rate for the pair is going down, for example, would that mean that the base or the Euro is getting cheaper in relation to the US dollar, it is weakening

I am sorry, but that is not correct. Right now, the Euro/USD pair closed on Friday at 1.2838. This means it takes 1.2838 dollars to buy a EURO. If the price goes down to 1.2500 for instance, it now only takes 1.25 to buy a EURO, so the dollar got stronger. Before, each EURO would buy about $1.28, but after the change each EURO only buys $1.25.

"Does it also mean that we are simultaneously buying the US dollar?
Also, when we buy/sell in the market window, does that refer only to the base currency?"

Each transaction involves buying 1 currency in the pair, and selling the other.
When you buy the EURO/USD pair, you are buying Euros and selling dollars.
When you sell the pair, you are buying dollars and selling Euros.

Cheers
Tek