Trading in foreign exchange market is different from trading in other financial markets. The difference lies mainly in the valuation. Normally in the financial markets, the valuation is done on solitary basis. It is the common way of understanding the other financial market prices and stock prices by the investors. However in the case of forex trading, the valuation is done on relative basis. This is a complicated and tricky method of valuation as compared to the valuation of traditional commodities and stocks.
The usual way of quoting the stock in a stock market is in dollars. Now the problem that arises is valuing dollars in the terms of dollars. One currency has to be valued in terms of another. This is the reason why all the foreign exchange transactions are carried out in pairs of currencies. The valuation of one currency related to another is called relative valuation.
When you take a currency pair like USD/JPY, the currency that is listed first in the given pair is the ‘base currency’ and the other one is the ‘quote currency’. Normally an established currency pair is used to quote the exchange rate.
In major cases of currency trading, the US dollar remains the base currency like for instance USD/CHF, USD/JPY. This is because the dollar has a higher value than the other currencies. The dollar is valued as 1 and based on this the changes in the value of other currencies are estimated.
The exception to the above rule is AUD, GBP and EUR which are as high as the USD or even higher than that. So, they become the base currency for valuation.
You have to understand the relationship between the base currency and the quote currency for tracing the increase or decrease signals from the price charts. If you keep these concepts in mind then relative valuation becomes easy and simple.
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