Forex quotes or the price of currency pairs are the basis of all operations, studies, strategies, and analyses carried out in this field. In this market, a quote means the price of one currency against another. So, EUR/USD means euro against dollar and its value is given by their ratio.
These quotes are expressed by two numbers, one higher and one lower.
The lower number is also called a “bid” and represents the price at which the intermediary (market maker) is willing to buy the currency in the numerator at any given time.
On the other hand, the higher number is called an “ask” and represents the price at which the intermediary (market maker) is willing to sell the currency to the numerator at any given time.
The difference between the bid and ask is called the spread. This difference represents the broker’s gain on the transaction, which is the only transaction cost in online Forex trading.
So, for example, if we have 100,000 EUR/USD (therefore 100,000 euro against the dollar) we could have a BID price of 1.3500 and an ASK price of 1.3502 where the difference of 0.0002 will represent the spread. The broker will buy at 1.3500 and will sell at 1.3502.
In this case, if for example we want to invest on the euro, we will buy the EUR/USD, that is to say, going “long” and earn if the price of the euro rises.
On the contrary, by opening a short position, we’ll aim for a downtrend and earn if the price of the euro falls.
How this translates into online Forex trading
In online Forex trading with CFDs, when you decide to take advantage of a possible rise in the euro (or a potential dollar downturn) you’ll open a “buy” type position, i.e. a “long”, that is bullish compared to the EUR/USD exchange rate. In this case, the trader (you), will earn proportionately on the EUR/USD exchange rate.
On the contrary, when you decide to take advantage of a possible fall in the euro (or a possible rise in the dollar), you open a “sell” type position, a “short” position, that is bearish with respect to the exchange rate EUR/USD. In this scenario, the trader (you), will earn proportionately on the EUR/USD exchange rate.
Profits and losses are always expressed in dollars (USD) and in the currency denominator in general.
Base Currency and Listed Currency
The terms “base currency” and “quoted currency” or “counter” are widely used in the field, especially “base currency” or “base currency”. If we take the EUR/USD currency pair as an example, the base currency is EUR. In general, the base currency is the one placed in the numerator, which is the first that is read in the currency pair.
The BID is the purchase price of the base currency for the quoted currency.
The ASK is the selling price of the base currency against the quoted currency.
Remember that in our definitions, we always use the base currency as a reference.
Using a broker’s forex trading platform (a subject which we’ll return to in several lessons), you will find a purchase price (bid) and a selling price (ask) for each currency pair. Prices will be different and the difference (spread) between them will represent the broker’s profit on the individual transaction.
On each trading platform you can see the real-time chart of the bid price. Sometimes you can also see the ask price chart.
An example of a Forex trading platform is the famous Plus500.
Go to the next lesson – Forex Brokers