Quotations and spread
The actual (bid or ask) price that is set for futures or options as well as the cash commodities at the certain moment is called a forex quote (or quotation). The most common usage of the quote, which is an indicator of the market price, is information.
Currencies quotations appear in pairs. The base currency is the first one in the pair whether the quote currency (or counter currency) is the second currency listed in the pair. The wholesale market operates with five-figured quotations where the last figure has the name pip (or point).
"Bid price" and "ask price" are typical for any financial product, and forex quotes as well. FXCM ensures the traders of getting the actual price for their transactions by having bid and ask quoted in real time. A position establishing requires an immediate cost like any other traded instrument. The trader's cost is seen out of the spread, e.g. the pair USD/JPY having a bid price at 131.40 and an ask price at 131.45 gives a five-pip spread that can be overcome due to the upward market movement.
You should be aware of two points to make the forex quotations easy for you to read. Firstly, the base currency is the name for the first currency of the pair; secondly, the base currency has always the value 1.
The 'base' currency for forex quotes is the US dollar as far as it is the main currency of the foreign exchange market. Such dollar-based pairs are USD/JPY, USD/CHF and USD/CAD. In this case, quote is understood as the amount of the second currency in the pair equal to one unit of the USD. E.g. 120.01 quote for the pair USD/JPY shows that one U.S. dollar costs 120.01 Japanese yen.
If the currency pair quotes rises and the U.S. dollar is its base currency, it means that the dollar strengthens and the second currency loses its value. E.g. if the quote of the pair described above goes up from 120.01 to 123.01 then the U.S. dollar is supposed to become stronger and the yen - weaker because no we can buy higher amount of yen for $1 than we could earlier. You should note three major exceptions: the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). These currencies are also often the major ones in pairs. E.g. if the pair GBP/USD has a quote 1.4366 then it is considered than one British pound costs 1.4366 U.S. dollars.
Some pairs do not include USD are called cross currencies. According to this, a pair quote EUR/JPY 127.95 explains that we can buy 127.95 Japanese yen for one Euro.
There is a two-sided quote containing 'bid' and 'offer' that can be often seen at the forex trading platforms. 'Bid' gives you the information at which price the base currency is sold (in this case, you would buy the counter currency). The 'ask' (or 'offer') gives you the purchase price of the base currency (when you sell the counter currency).
Direct and indirect quotes
Every country's Currency exchange market quotes its local currency against the USD as well as against other foreign currencies. The direct quotation sets the amount of the local currency required to purchase one unit of the foreign one as well as the amount of the local currency received when you sell one unit of the foreign one. E.g. for Japan the quote 120.44- 120.52 USD/JPY means that the dollar is bought for 120.44 yen whether it is sold for 120.52 yen per unit.
Indirect quote oppositely gives the amount of the foreign currency required in case you would like to purchase one unit of the local one as well as the amount of foreign currency you will receive if you sell one unit of the local one. This kind of quotes is used e.g. for trading the British pound sterling against the U.S. dollar and it looks like 1.3600 - 1.3610 GBP/USD. According to this quote, you must pay 1.3610 U.S. dollars if you want to purchase 1 British pound and in case you sell 1 GPB, you will get 1.3600 USD.
Bid Price, Ask Price (Spread)
Currency pairs have their "bid" (selling) and "ask" (buying) price like any other financial instrument like stocks, bonds or futures does. Spread is the difference between the bid and ask prices.
Otherwise, the rest of the funds at your account will be $4,900 in case the amount of money you risk is 1%. This will let you recover from the losses much faster and easier.
The second rule of the money management says that the profit expected from the deal is more than the money you risk. These requirements can be fulfilled by using limit and stop orders along with trailing stops.
For example, an expected profit of 25 pips should make you set the stop order 15 pips higher or lower than the price at which you entered the trade. The usage of trailing stops, as it was described earlier will make the expectancy ratio higher. If you use trailing stop, you will insure yourself from having high losses and will make your profits dominate.
A successful forex traders use these common techniques in order to make their profit stable and predictable. I do not think the more complicated information is worth giving, as the majority of readers do not know yet what forex is, so this is the basic information to give. There is additional information concerning various advanced and complicated strategies you can see on the web site.
The spread - the source figure used by the trader at the position taking
GBP/USD 1.6545/1.6550 Sell Price/Buy Price
If you are going to purchase the base currency (to long the pair) relying on your expectations of its increase, you should perform the purchase at the buy price which always higher than the sell price and you'll lose the spread difference if you suddenly decide to sell this currency at once. Simply speaking, the rise of the currency price that you have bought may cause you the losses.
In case you sell the base currency and decide to buy back the currency you have just sold while the rate did not move a point, then the difference you will lose will be the spread that is 5 pips in the given example.
The trading platform will inform you of the purchase or sale price at which you have bought or sold the currency pair. So if you have bought the pair, the trade platform will show you both your bought price and the current sell price which can be calculated as the by price subtracting the spread. If you want at least to break even, you should wait until the market makes at least a few pips up. The resume can be that the smaller the spread, the better as you'll have to wait a little time before the market moves enough pips for you to run a surplus.
Our advantages are that we have a direct access to trading that causes the existence of the minimum spreads, which are at least much smaller than any other financial market has and the absence of any fee paid for the brokerage houses out of each transaction.
The standard spread depends on the currency pair traded. In case the pair is traded much, the spread fluctuations will be low. To sum up, the majors' (the currency pairs traded most heavily) spreads are generally very tight while the crosses' and exotics' (the pairs that are traded less) ones are much wider. The standard spread for the Majors makes from 4 to5 pips whereas the spread of Crosses and Exotics reaches from 5 to 20 pips.
The "tighter" spread shows closer sell and buy prices and the "wider" spread illustrates further difference.
The sell price (bid) is constantly smaller than the buy price (ask). The price for the pair in forex market is usually shown in the following way where the sell price goes the first:
GBP/USD 1.6545/1.6550 Sell Price/Buy Price
The buy price is sometimes written with only two decimal digits left in the following way:
Here the spread is 5 pips. The buy price shows the amount of the secondary currency to be given in order to buy one item of the base one. The sell price shows the amount of the secondary price that you will get in order you sell one unit of the base one.