What is a forex rate and how to read it?
When we talk about the forex rate, we are referring to the relative value between two currencies - in other words, how much one currency is worth in relation to the other. For forex traders, the forex rate is the fundamental information they use to perform their job. The rate is to a forex trader what nails are to a carpenter.
If you plan to engage in forex trading, reading and understanding the forex rates is absolutely crucial to your success, similar to learning the basics of addition before becoming a mathematician.
A forex rate is always expressed in pairs, followed by a number. The number represents how much of the second currency you would receive for one unit of the first currency. For example, you might see USD/EUR: 0.7928. This means that one U.S. dollar is currently worth 0.7928 euros. If you were to exchange $100, you would receive 79.28 euros. Since the number in this rate (0.7928) is less than 1, it indicates that the second currency is stronger than the first currency - in this case, the euro is stronger than the U.S. Dollar.
Forex traders constantly monitor rates throughout the day. They carefully analyze trends in the performance of various currencies, noting which ones are rising and which ones are falling. If a rate suggests, for example, that the British pound is starting to increase in value compared to the euro, a trader might exchange their euros for pounds. Then, when new rates indicate that the pound has become very strong, they can exchange back, making a profit because the pound is now worth more than what they initially paid for it.
Forex rates are readily available online. Casual observers of the forex trading industry may refer to them on numerous websites. However, regular traders typically utilize software that keeps them updated on rates throughout the day, eliminating the need to visit specific sites to obtain them.
This is important because rates constantly fluctuate and can be influenced by a wide range of economic and political factors. The overall change over the course of a day is usually not more than a few percentage points in either direction, but there are regular minor changes, and these minor changes accumulate over time. Experienced traders closely monitor the rates for these small fluctuations, carefully observing whether there is a general upward or downward trend that requires their attention.