Spreads !!!

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: