Forex Trading - Understanding Currency Prices
Forex trading is always about buying one currency and selling another one simultaneously. The world of currency exchange, Forex (Foreign Exchange), employs terminology not used elsewhere in the investment world. Defining those terms, and providing a sample trade, will go a long way toward taking the 'foreign' element out of foreign exchange.
Currency trading is always done in pairs. In other trading, such as stocks and bonds, cash is exchanged for something else (a percentage of ownership, a promise to pay interest).
In Forex, cash is traded for cash. Euros are traded for dollars, dollars for yen, yen for euros and so on. There are dozens of trading pairs, just as there are dozens of currencies around the world that participate in the currency exchange markets.
The major players are US Dollar (USD), Euro (EUR), Australian Dollar (AUD), British Pound (GBP), Canadian Dollar (CAD), Japanese Yen (JPY) and Swiss Franc (CHF). Most of all daily transactions involve trading of these major currencies.
So, when reading quotes, investors will see prices listed as:
Name Bid Ask Change %Change High Low Time
EUR/USD 1.1901 1.1903 -0.0091 -0.76% 1.2024 1.1891 15:26
GBP/USD 1.7439 1.7442 -0.0004 -0.02% 1.7573 1.7410 07:01
The currency listed on the left is called the 'base currency' (EUR & GBP) and the second is the 'quote currency' (USD).
The 'bid' is the price at which brokers are willing to buy the base currency. The 'ask' price is that at which brokers are willing to sell the base currency. The quotes are always listed from the brokers' point of view. So if you (the trader) wants to buy the base currency the ask price will apply. If you (the trader) wants to sell the base currency the bid price will apply.
EUR/USD 1.1901/03 means
If you buy 1 EUR you will pay 1.1903 USD
If you sell 1 EUR you will receive 1.1901 USD
GBP/USD 1.7439/42 means
If you buy 1 GBP you will pay 1.7442 USD
If you sell 1 GBP you will receive 1.7439 USD
The difference between bid price and ask price at a single specific time is called 'the spread'. The spread is measured in pips (price interest points). The 'pip' is often said to be the smallest increment by which the price changes.
If the bid price of the EUR/USD pair changes from, say, 1.1901 to 1.1902 that's a single pip. That's a (bid or ask) price at two different times. Remember not to confuse this difference with the spread, which is a difference between the bid and ask price at a single, specific time.