Bid rate and ask rate in forex
The size of the bid-offer spread in a security is one measure of the liquidity of the market and of the size of the transaction cost. The trader initiating the transaction is said to demand liquidityand the other party counterparty to the transaction supplies liquidity.
Liquidity demanders place market orders and liquidity suppliers place limit orders. For a round trip a purchase and sale together the liquidity demander pays the spread and the liquidity supplier earns the spread. All limit orders outstanding at a given time i. However, on most exchanges, such as the Australian Securities Exchangethere are no designated liquidity suppliers, and liquidity is supplied by other traders.
The bid—offer spread is an accepted measure of liquidity costs in exchange traded securities and commodities. On any standardized exchange, two elements comprise almost all of the transaction cost —brokerage fees and bid-offer spreads.
Under competitive conditions, bid rate and ask rate in forex bid-offer spread measures the cost of making transactions without delay. The difference in price paid by an urgent buyer and received by an urgent seller is the liquidity cost. Since brokerage commissions do not vary with the time taken to complete a transaction, differences in bid-offer spread indicate differences in the liquidity cost.
The difference between those prices 3 pips is the spread. From Wikipedia, the free encyclopedia. Primary market Secondary market Third market Fourth market.
Common stock Golden share Preferred stock Restricted stock Tracking stock. Authorised capital Bid rate and ask rate in forex shares Shares outstanding Treasury stock. Electronic communication network List of stock exchanges Trading hours Multilateral trading facility Over-the-counter. Alpha Arbitrage bid rate and ask rate in forex theory Beta Bid—ask spread Book value Capital asset pricing model Capital market line Dividend discount model Dividend yield Earnings per share Earnings yield Net asset value Security characteristic line Security market line T-model.
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To make a profit in forex trading, you must buy low and sell high, although bid rate and ask rate in forex necessarily in that order. To know how much you are paying or what you are receiving from a currency transaction requires that you know how currencies are quoted. There are no official exchanges for trading currencies; instead, currencies are traded in the over-the-counter market. Consequently, there is no official global exchange rate. Currency exchange rates that are reported bid rate and ask rate in forex the news and the Internet receive their quotes from various sources, but when a trader decides to do a transaction, the exchange rate will almost certainly be different, because dealers set their prices according to the buy and sell orders that they are currently receiving.
Hence, different dealers will report slightly different rates, although arbitrage helps to remove major discrepancies of the different markets. There are 3 types of major players in the foreign exchange market: Bid rate and ask rate in forex dealers generally supply the quotes for news organizations and websites, since they conduct most of the foreign exchange transactions, so they have a more accurate picture of the supply and demand for each of the individual currency pairs, which will yield a more accurate foreign exchange rate.
Nonetheless, there will be slight differences in the exchange rate reported by different dealers. Almost all trades by reporting dealers are conducted electronically. Virtually every country, with some small exceptions, has its own currency, and most of them can be traded. However, the currencies of a few countries are the most actively traded, and constitute, by far, the largest volume of trades.
The currencies are unambiguously identified by codes that have been standardized by the International Organization for Standardization ISO. The ISO standard for currencies is ISOlisting both the alphabetic code and numeric code of over currencies, including any minor units of the currency, which is the smallest subdivision of the currency.
However, the ISO uses a strange method for depicting the minor unit of a currency. It uses the log base 10 of the number of minor units equal to one unit of the currency.
In fact, most currencies have a minor currency code of 2. The format of the 3-letter alphabetic code: As you can see, each of this symbols ends in " D ", which designates the dollar name. However, sometimes the country name or currency that is symbolized is not the most common name.
In addition to currencies, 4 metals — sometimes referred to as either forex metals or FX metals — can also be traded in forex accounts. Their symbol is formed by appending the element symbol with the letter X:. A 3-digit numeric code is also specified for each currency to facilitate the representation of the currencies in computer systems and to identify currencies for countries that do not use a Latin alphabet.
For instance, USD has a numeric code of One of the purposes of money is as a convenient form of barter. Money is desired not so much for the thing itself, but what it can be exchanged for. Thus, in virtually every transaction, money constitutes one side of the transaction.
Thus, money is exchanged for a car, for groceries, for services, and so on. Because money is the universal barter, everything else is measured in terms of it. Both prices are expressed as the amount of money that would have to be given in exchange for the item. However, there is an equivalent way of thinking about these transactions that allows a better understanding of currency exchanges.
Buying a loaf of bread for 2 dollars is the same as selling 2 dollars for a loaf of bread. In other words, it is nothing more than an exchange. Since money is the medium of exchange, everything is priced in terms of money. But when you buy currency, then both items exchanged are money. When you are looking at currency quotes, it is important to understand the format of the quote.
Currency is always quoted in pairs. The 1 st quote is for the base currencyand is a unit of that currency. The 2 nd currency is the quote currency aka counter currencywhich is the amount of the currency equal to a unit of the base currency.
Find the approximate foreign exchange rate quickly by typing the currency pair in the search box for Google example: The 2 search engines do not always provide the same quote, so just use it as a quick approximation. In forex, there is a standard in assigning the base currency to a currency pair, so when currencies are quoted, the bid rate and ask rate in forex with higher priority is the base pair.
The priority of the major currencies is as follows:. These currencies are considered to be bid rate and ask rate in forex major currencies — sometimes referred to simply as the majors — while all other currencies are considered to be minor currencies — sometimes simply referred to as bid rate and ask rate in forex. Forex quotes of a major currency and a minor currency will usually list the major currency as the base currency. However, in certain situations, other types of quotes may be more desirable, and the media may report different quotes.
The main advantage of these different types of quotes bid rate and ask rate in forex that the base currency or quote currency remains the same for different currency pairs, regardless of the currency priority.
Currency futures in the US are also reported as American quotes. There are 4 major types of currency quotes:. When you buy something in a store in the United States, the smallest unit of price is 1 cent. This is because the coin with the least value is the penny, and so it would not be possible to sell or buy something for less than that, if only a single item is purchased, as is bid rate and ask rate in forex the case.
However, because the quote currency is valued as a unit of the base currency, which makes it easier to compare different currency values and changes in currency values, and because a large amount of currency is usually traded, a smaller unit of measurement is convenient in expressing currency prices. This smaller unit is called a pipwhich is equal to. For US traders, a pip value in another currency must be converted to US dollars. A well known exception to the value of a pip is the Japanese yen.
Thus, most currency quotes are expressed by 4 significant digits, and the Japanese yen is expressed to 2 significant digits. The pip is the smallest value quoted by brokers and dealers. However, larger transactions may be reported to 5 or 6 decimal places.
Prior toexchange rates were expressed to 4 decimal places, equal to the number of pips. For instance, euro conversion rules require at least 6 significant figures.
A term that traders sometimes use is called the handlewhich represents a specific decimal place, so that if the handle changes, then that would represent a significant movement in the value of the currency.
So if the euro was at 1. If the bid rate and ask rate in forex changed to 1. Most investors buy currencies from market makers, or dealers, in that currency, who are commonly referred to as brokers. A dealer makes money by buying at one price and selling a little higher.
When the dealer sells, the trader is buying, and when the dealer buys, then the trader is selling. The trader pays the broker's ask price aka offer priceand the trader sells to the broker for the broker's bid priceand the difference between the prices is called the bid rate and ask rate in forexwhich in currencies, is usually at least 4 pips.
The bid price for the trader is always lower than the ask price, because that's how forex dealers bid rate and ask rate in forex money. If you want to buy currency, you have to pay the higher ask price, but if you want to sell currency, you have to sell it at the lower bid price. So if you were to buy currency, then immediately sell it back to the same dealer, the dealer would make money, and you would lose money.
Thus, the spread is the transaction cost of trading currency. For major currencies, the spread is usually about 3 to 5 pips or more, depending on the dealer. For minor currencies, or for major currencies during high volatility or low volume, the spread can be much greater.
Although many brokers advertise 2-pip spreads, you will rarely see spreads less than 4 pips from a dealing desk broker. The actual transaction cost is determined not only by the spread, but also by the lot sizes of currency trades. Most regular accounts trade in lots ofunits, and so a pip, when multiplied by the size of the account, will equal 10 units of currency. Most mini-accounts trade in lot sizes of 10, units, and so a pip will equal 1 unit of currency.
If the quote currency is other than USD, then the pip value would have to be converted if you wanted to know your profit or loss in USD. Since there are 10, pips to each unit of currency, and most lot sizes are either K or 10K, the total pip value can be found by the following formula:.
When the quote currency is the trader's native currency, then there is no need to multiply by the conversion rate for that currency. The quote convention in forex is based on the fact that there are 2 quotes for any currency, the bid quote and the ask quote, both of which are expressed as a unit of the base currency. The bid price is usually expressed to 4 significant digits after the decimal point, which represents the number of bid rate and ask rate in forex.
The ask price is usually expressed as the significant digits that are different in pips from the bid price. For instance, you may see a quote such as the following:.
This quotation is expressed in terms of the dollar, but if the quote currency is bid rate and ask rate in forex Euro, then it would be quoted this way:. This is equivalent to the above quoted price, but expressed as Euros per dollar rather than dollars per Euro.
You can find the equivalent quote by dividing 1 by bid rate and ask rate in forex quote. Note that rounding errors makes the round trip conversion inexact, but you get the idea. In forex trading software, currency quotes are generally displayed in 2 parts: The big figure is the main price that is usually the same for both the bid and ask quotes. The dealing priceor the handleis the last 2 digits of a currency quote that are different for the bid and ask quote.
Because it is more important in regards to trades, the dealing price is, ironically, usually displayed in larger fonts than the big figure in forex trading software. Any currency can be traded for any other currency. Cross currency quotes lists each currency in terms of the other currencies. Here is an example of key cross quotes of 4 major currencies:.
Note that the 1st column is the base currency while the 2nd row is the quote currency.
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