Understanding Currency Quotes of Forex
In the forex market, all price quotes are represented by two prices, known as the bid price and the ask price. Both the bid price and ask price represent the exchange rate of the base currency pair against the quoted pair, except they serve two different functions. The bid price indicates the price at which your currency dealer is willing to buy the base currency from you in exchange for the quoted currency.
The ask price indicates the price at which your currency dealer is willing to sell you the base pair in exchange for the quoted currency. There is always a difference between the bid price and the ask price; this difference is known as the spread. The spread is usually less than five pips on major currency pairs. Cross-currency pairs such as GBP/JPY may have much higher spreads. The spread is the way a currency dealer earns money for executing a trade. Figure 1.2 shows the difference between the bid and ask prices offered in the forex market. The difference between the two prices is known as the spread.
Figure 1.2
Using the prices quoted in Figure 1.2, if a trader wanted to buy EUR/USD, his currency dealer would sell it to him using the ask price of $1.4002. To sell the position at least at breakeven, the trader needs the bid price to move up two pips, to $1.4002. Alternatively, if a trader wanted to sell the EUR/USD, the currency dealer would sell it to him at the bid price of $1.4000 and the trader would need the market to fall by two pips before he could sell it at the ask price for a breakeven trade. The two-pip spread in this EUR/USD example is the cost of doing business with this currency dealer.
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