forex-online-trading

Rate of Foreign Exchange

What is rate of foreign exchange and how to read it?

Rate of foreign exchange is the relative value between two currencies – how much is one currency worth in terms of the other currency. Forex rate is always relative value between a pair of currencies. Foreign exchange rates between different pairs of currencies are the basic information that are used in foreign exchange trading. Understanding and reading foreign exchange rates is the basic skill that forex trader has to acquire, much like learning the basics of calculation before one becomes a mathematician.

As already mentioned a forex rate is always in pairs of foreign currencies, for example US$ and Euro. This pair may be expressed as USD/EUR followed by a number. Each currency has been assigned a 3-digit code that is used universally. US$ is expressed as USD and Euro is shown as EUR. The number which follows the pair indicates how many of second currency is worth one of the first one. For example, say a forex rate is expressed like this:

USD/EUR : 0.7838

This indicates that one of first currency (US$ 1) is equal to 0.7838 of second currency (Euro), or

US$ 1 = 0.7838 Euro , or
US$ 100 = 78.38 Euro

The forex rate of any pair of currencies keeps on changing all the time as market perception changes. The forex trader has to watch the forex rate he or she is interested in constantly, or he (or she) may use software to monitor the forex rates. The traders examine trends in various currencies’ performance, noting which are going up and which are going down. If a rate suggests, say, that the British pound is starting to increase in value compared to the euro, a trader might exchange his euros for pounds. Then, after new rates show the pound has become very strong, he can swap back again, turning a profit because the pound is now worth more than he “paid” for it.

Forex rates are available at numerous places all over the Internet. Interested observers of the forex trading industry might glance at them for reference on hundreds of different Web sites. Regular traders, though, usually own software that keeps them up to date on rates throughout the day, without having to visit a particular site to get them.

This is important, because rates change constantly, and can be influenced by a wide variety of economic and political factors. The overall change over the course of a day usually isn’t more than a few percentage points either way, but there are minor changes regularly, and those minor changes add up in the long run. Experienced traders watch the rates for those tiny fluctuations, carefully observing whether there is a general upward or downward trend that requires their attention. More important, the traders watch for any CHANGE in the upward or downward trend. The points at which the forex rate changes direction are the profitable trading points.

For example, say Euro has started to become stronger in relation to US$. An astute trader will identify the beginning of this upward trend. He will purchase Euro with his US$ or convert his US$ in Euros. The he will watch for reversal of this upward trend. He will try to identify the end of the upward trend and at this point, when Euro has become stronger in relation to US$, he will sell Euro and purchase US$. This time he will get more US$ for his Euros than he used to purchase those Euros. Therefore he will end up having more dollars than he started with. These extra dollars, minus the trading expenses, are his profit.

posted by Sanjay Johari @ 10:48 PM