# Forex Training Series – Price

Non Forex traders are generally under the impression that the math involved with Forex trading is more complicated than in other forms of trading. Truth is the math involved in currency trading is exactly the same as in any other form of trading. We use the same addition, subtraction, multiplication and division we learned in grade school.

In stock trading the evening news anchor announces the Dow gained 30 “points” today, and in Forex trading we hear the US Dollar is up 30 “pips.” Well that’s fine, but points and pips won’t pay our rent. So let’s convert “points” and “pips” using the basics of Forex math into what it means to us – money. This section will cover basic, but very important principles we utilize in our daily trading activities – prices.

The first thing that you’ll notice about the prices in most currency pairs is they have a couple extra numbers in them compared to a stock quote, or the actual currency exchange rate listed in the travel guide. A typical stock quote looks like “Sprint = 5.71” in the financial section of your local paper; and the published Canadian Dollar to US Dollar exchange rate looks like 1 US Dollar = .98 Canadian Cents. But the traded currency pair rate we use in the Forex market for the same currency is USD/CAD = 0.9887.

Two main reasons exist for breaking down the unit of currency past the .01 cent level. First – the sheer volume of trading on the currency market. The Forex market trades more money in one day than all the stock markets combined trade in a month. Second – the size of the lots we trade in Forex. Stocks typically trade in 100 share standard lots, whereas one standard lot of a currency pair is 100,000 units of the base currency. A full one cent move on a currency pair is a very large movement when considering the huge amount of money being shifted; hence we need to monitor currency prices down to the sub penny level, usually four decimal places out.

Currency pair prices are standardized in the Forex community. As in the above example, the first price in the pair is considered the base price and always has a factor of one. An example would be EUR/USD = 1.5561, where one Euro equals 1.5561 US Dollars. Yet another example GBP/CHF = 2.0510, means one British Pound equals 2.0510 Swiss Francs. The only difference to the look of Forex quotes concerns the Japanese Yen. Since its valuation is in the hundreds, it still retains only two decimal places to the right and typically looks like EUR/JPY = 155.89, again where one Euro equals 155.89 Japanese Yen.

The second thing that is different when viewing trading pair quotes is two sets of numbers for the same currency pair. If you research the trading quote for the EUR/USD, it will look like 1.5669/72. Just as in stock trading you see a bid and an ask price. Some brokers may list this as a bid and offer price. Either way it means the same thing and is easiest to remember as the buy and sell price of the listed currency pair. The first price listed is the amount someone is willing to buy the pair for, the second is the amount someone is willing to sell the pair for. Here someone is willing to buy the pair at 1.5669 and someone is willing to sell the pair at 1.5672. Unless one side or the other changes their price – there is no trade unless those prices are met.