Mathematical analysis of conditions within the FOREX market are quite complex and can require the solution of differential equations and statistical models. But if you understand just one, very simple arithmetic division relationship, you should be fine.

The equation is just the currency pair expression itself, ex. GBP/USD.

Currency pairs compare the value of one currency to another. So, the writing of the currency pair as GBP/USD is actually a ratio between the base currency (GBP), and the quote currency (USD).

The quote currency means that the expression results in the ratio being stated in that currency's denomination. Thus, if the current price of, for example, GBP/USD is 1.3500, then 1.3500 is the value of GBP/USD in USD.

Of note is that to this post, I have a companion video of the same title: Most Important FOREX Analysis Math Equation that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

GBP --- = 1.3500 USD

The above shows that 1 GBP will buy $1.35 of USD.

1 --- = $1.3500 USD

It means that if a U.S. citizen buys a product that costs 1 Pound GBP that it will cost that U.S. citizen $1.35, or $.35 more.

What about if the U.K. citizen wants to buy $1 USD of product? What will that effectively cost them?

1 --- = $1.3500 USD

1 = 1.35 * USD

1 ----- = USD 1.35

USD = .7407

That means a U.K. citizen with .7407 Pence GBP has the purchasing power of $1 Dollar USD.

This means we have the following situation:

1 ----- = 1.3500 .7407

Hummm.... What if the GBP currency gets stronger to, say 1.0010, 10 pips?

1.0010 ----- = 1.3514 .7407

Yikes! Now the U.S. citizen will have to pay $.0014 more for the same U.K. product that's listed for 1 Pound GBP. That means that if GBP strengthens over the USD it will cost more for a person in the U.S. to buy that U.K. product.

What happens if GBP weakens against the dollar by 10 pips?

.9990 ----- = 1.3487 .7407

Ooops! That caused the ratio to go down by about $.13. That means when the GBP lost value, the USD gained value against it because it takes less USD to buy that same same U.K. product.

So, if GBP increases in value, USD decreases in value, and if GBP decreases in value, USD increases in value.

And that is a profound description of currency valuation. If you don't understand this dynamic relationship between the 2 pair countries, you-are-screwed in any sort of currency market analysis.

To keep the math simple, I'll assume a static value of each currency to be 10, an increase in price to 20, and a decrease in price to 2.

Currency Pair Price Variation Analysis

Static Price...
GBP⁰ --- USD⁰		10 ---=1 10	→	10 ---=1 10		Static−
Rising Price...
GBP↑ --- USD		10 ---=1 10	→	20 ---=2 10		UP↑
GBP --- USD↓		10 ---=1 10	→	10 ---=5 2		UP↑
GBP↑ --- USD↓		10 ---=1 10	→	20 ---=10 2		UP↑↑
Falling Price...
GBP↓ --- USD		10 ---=1 10	→	2 ---=.2 10		DOWN↓
GBP --- USD↑		10 ---=1 10	→	10 ---=.5 20		DOWN↓
GBP↓ --- USD↑		10 ---=.1 10	→	2 ---=.1 20		DOWN↓↓

And that's the problem in looking at currency pair pricing: it's so obvious. Too obvious....

It's so obvious that it's totally overlooked as one of the key components of the FOREX market. The interaction of the pairs in this relationship reveals the entire underpinnings of the economics of market supply/demand, central bank interest rate policy, large institutional order flow, etc.

If you fully understand the price differential correlation between the pair, then you need very little actual fundamental understanding to do your trade entry analysis.

That's how important this relationship is to understand.

Video: Most Important FOREX Analysis Math Equation