What is the exchange rate? How to read exchange rates? When trading forex, traders often see the phrase exchange rate. So how does it work? We will find out in the article below.
What is the exchange rate?
To trade forex, traders need to look at the exchange rate of a particular currency pair to choose when to trade. A currency pair requires two currencies. In addition, the exchange rate of a forex pair is the comparison rate between these two currencies.
The first currency in a forex pair is called the base currency. The second currency is called the quote currency. The value of the base currency (front) is always one, and the forex rate of the currency pair is the required amount of the quote currency (behind) in exchange for 1 unit of the base currency.
For example, the EUR/USD rate is 1.099. That is, the trader must have $1,099 to trade with 1 €.
How to read exchange rates?
There are always two currency pairs on the exchange rate table, so understanding the displayed price is always the first question of newcomers to the forex market.
Note when reading the exchange rates:
1. The first currency in the currency pair is called the base currency. The other currency is called the quote currency.
2. The base currency always has a unit of 1.
Example: USD/JPY = 80.12
• So USD is the base currency.
• JPY is the quote currency.
• 1 USD = 80.12 JPY
Supply, demand and spread in exchange rates
Each currency pair usually appears in 2 different numbers that appear in the same rate as a forex pair.
The two prices that appear in the forex rate are called bid price and ask price.
- The bid price is when a trader sells forex pair and expects the price to fall to profit.
- The asking price is when a trader buys a forex pair and expects the price to rise to profit from it.
- The bid price is always lower than the asking price.
The difference between bid and ask prices is called the spread. The spread will be different for each forex pair and a different broker. Brokers profit from spreads. However, the forex market has more and more brokers. Brokers attract traders by reducing spreads.
The role of the USD in exchange rates
The USD is often the base currency.
So we can implicitly understand that the USD is more valuable than the other currency.
When the USD is the base currency and the exchange rate rises, the USD appreciates and the other dong (the quotation dong) depreciates. In other words, more USD is bought against the other.
The USD is the quote currency.
There are 3 cases where USD is not the base currency. These are currency pairs involving the British pound (GBP), the Australian dollar (AUD) and the euro (EUR).
When the exchange rate rises, that currency (GBP, AUD or EUR) strengthens and the USD weakens.