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1. Bid and Ask Quotes

There are two parts to a Forex quote, a bid and an ask. Here's another Forex quote that helps make clear the meaning of these terms in the Forex market:

EUR/USD = 1.3600/05

Here the bid is 1.3600, and the ask is 1.3605. Since the difference between a bid and an ask price in normal circumstances is a very small fraction—less than 1/100th of the currency unit—the convention is that only the last two digits (05) of the four trailing digits are shown. If you spelled this out, it would look like this:

EUR/USD  = 1.3600/1.3605

Contrary to what you may think when you begin exploring the Forex market, a bid price is not the price you'll bid when you want to buy a currency pair.

Instead, the two terms are used from the perspective of the Forex broker. From the broker's perspective, when you're the potential buyer, the broker will ask for a little more than what he might be willing to bid if you were selling. In the given example, since you're interested in buying EUR, the base currency, you'll pay the ask, the broker's asking price, which is 1.3605. If you were selling, you'd accept the broker's bid, which is 1.3600.

If you find these terms initially confusing, it helps to remember that the terms bid and ask are from the broker's perspective, not yours. When you're buying, you'll pay what the broker's asking for the currency; when you're selling, you'll need to accept what the broker's bidding.  

The difference between the bid and the ask is called the spread. The spread is simply the broker's commission on the trade.

2. Spreads

Forex brokers quote two different prices for currency pairs: the bid and ask price.The difference between these two prices is known as the spread. The spread is how “no commission” brokers make their money. Instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair you want to trade.

The spread is usually measured in pips, which is the smallest unit of price movement of a currency pair. An example of a 4 pip spread for USD/JPY would be 110.00/110.04, and an example of a 2 pip spread for EUR/USD would be 1.1051/1.1053.

1) Types of Spreads

The type of spreads that you’ll see on a trading platform depends on the forex broker and how they make money.

There are two types of spreads:

·Fixed

·Variable (also known as “floating”)

Fixed spreads stay the same regardless of what market conditions are at any given time. As the name suggests, variable spreads are always changing. In this case, spreads widen or tighten based on the supply and demand of currencies and the overall market volatility. Typically, spreads widen during economic data releases as well as other periods when the liquidity in the market decreases.

Fixed spreads are usually offered by brokers that operate as a market maker model, while variable spreads are offered by brokers operating a STP/ECN model.

2) Spread Costs and Calculations

It’s pretty easy to calculate and all you need are two things:

·The value per pip

·The number of lots you’re trading

In the quote above, you can buy EURUSD at 1.12747 and sell EURUSD at 1.12736.

This means if you were to buy EURUSD and then immediately close it, it would result in a loss of 1.1 pips.

To figure out the total cost, you would multiply the cost per pip by the number of lots you’re trading.

So if you’re trading mini lots (10,000 units), the value per pip is $1, so your transaction cost would be $1.10 to open this trade.