A beginner’s guide to forex quotes and spreads

Trading forex involves buying or selling various financial instruments including currency pairs, stocks and commodities. All these financial instruments are quoted according to the forces of supply and demand in the market and currencies that are in high demand offer the most favourable spreads.

A beginner’s guide to forex quotes and spreads

How are currencies quoted?

In terms of online forex trading, currencies are traded in pairs and each currency has its own codename. For example, EUR stands for the shared currency of the European Union, the euro and USD refers to the United States dollar.

Since currency trading aims to generate profit from the exchange rate differential between two different currencies, currencies are quoted in pairs, which effectively means you are selling one currency to buy the other.

Therefore, if you want to trade the euro against the U.S dollar, you will want to look for the EUR/USD currency pair in your trading platform. As such, in all currency pairs we have the base currency and the counter or quote currency.

The base currency is always the first one that appears in the pair and the counter or quote currency is the second one. In the EUR/USD example, the exchange rate expresses how many USD we can exchange for 1 EUR.

 

Major currency pairs

Some of the most popular currency pairs traded actively in the industry are the EUR/USD, GBP/USD, USD/CHF, USD/JPY and USD/CAD. As you can see, all these pairs include the USD as the base or counter currency. This is because the U.S dollar is the most powerful and valuable currency in the world and there is high demand for this currency on the global stage.

Currency pairs that consist of the USD and another currency of a strong economy as those listed above are commonly known as the major forex pairs and are typically the most traded ones as the high demand translates to better prices.

 

Quote prices

We already mentioned that you can either buy or sell a currency pair in the forex market and therefore, each currency pair is quoted in two different prices on the trading platform, depending which side of the trade you are taking.

The first price is referred to as the Bid and the second one is known as the Ask price. When you are buying a currency pair or going long, you will be paying the Ask price which is the value set by the sellers while selling a currency pair means you will be receiving the Bid price.

Therefore, when you see that the EUR/USD currency pair quoted as 1.1832/1.1835, it simply means that when selling this pair, you will be receiving 1.1832 (Bid price) dollars for each euro or that you need 1.1835 dollars to buy one euro.

 

Forex spreads

There is always a small difference between the Bid and Ask price for each pair and the Ask price will always be higher than the Bid. This difference in prices is what makes up the spread, which is the trading fee you are paying for opening a position on the market.

The spread is measured in pips which are also the smallest amount of movement in the exchange rate of a currency pair. In our above example where EUR/USD is quoted as 1.1832/1.1835, there is 3 pip difference between the Bid and Ask price and therefore the spread for opening a position in EUR/USD will only cost you 3 pips.

This is quite a favourable spread considering the profit potential of a EUR/USD trade which typically moves for more than 100 pips in a daily trading session, however, it’s important to note that the spread can fluctuate and may widen during times of increased volatility in the markets.

In general, though, most traders prefer trading the major currency pairs because they typically have the lowest spreads and are therefore more competitive than other pairs.

If the price of a currency pair doesn’t typically move by a high margin during a day, it’s not considered viable especially if the spreads are too high since it would mean there won’t be enough price increase or decrease to overcome the cost of the spread and make a profit.

 

If you are interested in learning more about currency trading, you can open an account with CM Trading, a regulated forex broker licensed by the Financial Sector Conduct Authority (FSCA) in South Africa.

CM Trading offers premium trading conditions to its clients across hundreds of tradable assets and powerful leverage that magnifies your potential profits in currency trading by a factor of 200:1.

 

Register now to start trading the global financial markets with an award-winning broker!

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