Part 4 of 5 - Understanding Currency Conversion

Part 4 of 5 - Understanding Currency Conversion

17 July 2014, 20:45
Frank Breinling

Trading in the Forex market will go much better if you have an understanding of currency conversion, as well as some knowledge of how currencies are exchanged across international lines. You will need to have a sound knowledge of the domestic market, and also foreign markets whose currencies you may want to trade.

Working With Multiple Currencies

Since the Forex market is traded in a large number of different countries, you will find that not everyone is interested in trading in US dollars. While you may see it as the strongest currency in the world, not everyone else will. With so much volatility and so many different currencies in play, how can you possibly know the potential value of a currency without having a strong knowledge of its value?

The easiest way to get an idea of value is to find a source that will show you the value of one currency when compared to another. This is something that should be looked at before you even think about making a trade. There is, of course, no way to get an exact value at any given time, but this basic tool will get you close enough to allow you to make an informed decision. Finding this type of information online is incredibly easy, and you can also get it if you decide to trade through a broker.

Currency Expression

It’s also important that you understand how currency conversion is expressed, which is usually done in a method known as the cross-rate. This method generally shows the currencies listed as an XXX/YYY ratio. The XXX value represents the base currency, and will be listed as a whole number. The YYY value will be listed as a decimal number that most closely matches the base currency rate. Going back to car terms once more, it would be like comparing the miles per gallon or RPM on a car, with a direct comparison of both done in the form of a ratio.

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