What a forex rate is and how to read it

When we talk about the forex rate, we’re talking about the relative value between

two currencies -- how many of one the other is worth, in other words. For forex

traders, the forex rate is the basic information they use to do their job. The rate is

to a forex trader what nails are to a carpenter.

If you plan to get involved in forex trading, reading and understanding the forex

rates is absolutely vital to your success, like learning the basics of addition before

becoming a mathematician.

A forex rate is always expressed in pairs, followed by a number. The number is

how many of the second currency you’d get for one of the first one. For example,

you might see USD/EUR: 0.7928. That means that one U.S. dollar is currently

worth .7928 euros. If you were to exchange $100, you’d get 79.28 euros for it.

Since the number in this rate (0.7928) is less than 1, that means the second

currency is currently stronger than the first one -- that is, the euro is stronger than

the U.S. dollar.

Forex traders look at rates constantly throughout the day. They carefully 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 swap his euros for

pounds. Then, when 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 everywhere on the Internet. Casual observers to 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.

 

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