It is the difference between BUY and SELL, or BID and ASK. In other words,
this is the difference between the market maker's "selling" price (to its
clients) and the price the market maker "buys" it from its clients.
If an investor buys a currency and immediately sells it (and thus there is no
change in the rate of exchange), the investor will lose money. The reason for
this is “the spread”. At any given moment, the amount that will be received
in the counter currency when selling a unit of base currency will be lower
than the amount of counter currency which is required to purchase a unit of
base currency. For instance, the EUR/USD bid/ask currency rates at your
bank may be 1.2015/1.3015, representing a spread of 1,000 pips (percentage
in points; one pip = 0.0001). Such a rate is much higher than the bid/ask
currency rates that online Forex investors commonly encounter, such as
1.2015/1.2020, with a spread of 5 pips. In general, smaller spreads are better
for Forex investors since they require a smaller movement in exchange rates
in order to profit from a trade.
Prices, Quotes and Indications
The price of a currency (in terms of the counter currency), is called “Quote”.
There are two kinds of quotes in the Forex market:
Direct Quote: the price for 1 US dollar in terms of the other currency, e.g. –
Japanese Yen, Canadian dollar, etc.
Indirect Quote: the price of 1 unit of a currency in terms of US dollars, e.g. –
British pound, euro.
The market maker provides the investor with a quote. The quote is the price
the market maker will honor when the deal is executed. This is unlike an
“indication” by the market maker, which informs the trader about the market
price level, but is not the final rate for a deal.
Cross rates – any quote which is not against the US dollar is called “cross”. For
example, GBP/JPY is a cross rate, since it is calculated via the US dollar. Here
is how the GBP/JPY rate is calculated:
