It is important to know that all currencies are priced in pairs. There are two parts to each pair: the base currency and quoted currency. The U.S. Dollar acts as the base currency to most currencies around the globe. Quotes are given in units of $1 per counter currency. For example, a quote of 1.5004 for the Canadian Dollar indicates it takes 1.5004 Canadian Dollars to equal $1. The three exceptions to this are: Euro, British Pound, and Australian Dollar. These currencies are based against the dollar and are quoted as such.
Once you understand that currencies are quoted in pairs it gets a little easier to know how to read them. Whenever the quote moves higher it means the base currency is rising in value. When the quote moves lower it means the base currency is weakening. With Forex trading you aren't exactly buying a currency, you are exchanging one for another. When you "buy" a specific currency you are expecting it to rise in value against the one you exchanged it for. Forex quotes will always come in five numbers. The last number, or smallest increment, is known as a pip. There are two parts two a Forex quote: the bid price and ask price. The bid price that where the market maker is willing to buy the currency. The ask price is that where the market maker is willing to sell the currency. The cost of the trade is the spread between the ask and bid price. A quote for USD/CAD of 1.2031/36 indicates a spread of five pips. This spread must be made up before the trade becomes profitable. The best way to get a grip is to look at a typical trade. Assume you expect the US dollar (USD) to rise in value against the Swiss franc (CHF). To execute the trade you would need to simultaneously sell francs and buy dollars. The current quote is USD/CHF 1.1645/50. You execute the trade and buy $100,000 and sell 116,450 francs. You are now long the USD and short the CHF. You need the asking price to move above 1.1650 to make a profit on the trade. But something goes wrong and the price moves down to 1.1045. To stop the loss you need to sell the dollars and buy back the francs. You sell your $100,000 for 110,450 francs for a loss of 6,000 francs. To convert the loss to USD, simply divide by the exchange rate. In this case the 6,000 franc loss converts to $5,432.
