Forex:Currency Expression

It is also good to understand the means be which the
currency conversion is expressed. The comparison is usually
made in a ratio known as the cross-rate. In this
configuration, the two currencies are listed in an XXX/YYY
ratio, with the XXX position referred to as the base currency.
The base currency is usually expressed as a whole number,
while the YYY position is expressed as the decimal that most
closely matches the based currency rate. It is sort of like
making reference to miles per gallon or rotations per minute
on a car – a direct comparison of one to the other in the
form of a ratio.

The smallest fraction, or decimal, in which a currency can be
traded, is called a pip and this is usually the degree to which
a cross-rate is expressed. For example, if the British pound
sterling can be traded in thousandths, the currency will be
expressed to the third decimal place. The U.S. dollar is
often expressed to the hundredth of a cent (the fourth
decimal place).

In one cross-rate expression example, one U.S. dollar may
be equivalent to 117.456 Japanese yen. This ratio would be
expressed as 1.000/117.456. The base currency is almost
always expressed as a single unit (as in one dollar as
opposed to ten dollars), and frequently that unit of
measurement is the U.S. dollar. Since the whole number
value (or big figure, as it is referred to) of the secondary
currency, or the currency in the YYY position in terms of
conversion changes so infrequently, often only the decimal
portion of the number is mentioned in the Foreign Exchange
Market.

Therefore, in the ratio above, you may hear that the yen is
trading at .456, with no mention at all of the 117 whole yen
that is shown in the ratio. This is because the exchange rate
may vary from 117.456 to 117.423, but not to 119.024.
Experiencing a change in the big figure – the whole number
ahead of the decimal – unless it was only because the
number was already within a few thousandths, would
represent much too large a shift in value for a single tradingperiod and would be a rare occurrence that could cause the
entire market to make a drastic swing in one direction or the
other.

The most common currencies found in Forex are the U.S.
dollar, the British pound sterling, the Euro, the Japanese
yen, and the Australian dollar. In the past, there would
have been many more currencies to keep track of (such as
the franc, the lira, or the Deutschmark). However, with the
consolidation of most of the European market trading on
Forex to the Euro, many currencies have been eliminated,
making trade on Forex for other lands less complicated.
If you purchase a commodity in a particular currency, and
that currency’s value falls against the U.S. dollar, you can
actually make money by selling that same commodity in
dollars. The same is true in reverse should the value of a
foreign currency increase against a U.S. dollar. Of course,
you can only take advantage of such a situation should the
commodity be traded in both currencies and both markets in
question. We will discuss this process, as well as other ways
to take advantage of the Foreign Exchange Market (like
arbitrage) in more depth in future chapters.

Once you are able to discern a base value of each particular
currency and its conversion rate against others traded on
Forex, you will be able to more closely monitor the change
in currency conversion, including its inconsistency and
volatility. Such ideas will not seem so “foreign”, and you
will be caught up and knowledgeable right along with the
pros. Then, you will need to learn how to read, understand,
and ultimately interpret additional market trends.