Pricing in the Forex market consists of the bid price and the ask price. Usually prices are in the brokers favor, as this is how he makes his money. The ask price will always be higher than the bid price, so when you trade on the Forex market, you end up buying high and selling higher.
If you want to purchase a currency pair, you will pay whatever the asking price is. For example, if you look at GBP/USD and you think that the pound will become stronger than the dollar, you would try to buy the pound at a lower rate and sell the dollar since you are predicting it will weaken as against the pound. The pound is considered as the "base currency" and will control the trade, which is called a long position.
The price that you sell at is called the bid price. Using the GBP/USD example, if you predict that the dollar will come back and eventually become stronger than the pound, you would take a short position and sell the pound and buy the dollar. The base currency will still control the direction of the trade.
When you are purchasing the cross currency, the one that is not controlling the trade, all of the signals are reversed in a short sale. The price of the currency pair will then decrease. As you sold the currency pair, you want the price to decrease and will only earn a profit if the price of the pair declined.
Calculations of the number of pips you earn over a short trade are the same as in a long trade to determine your actual profit. It is best to ignore the purchase or sale price and just figure out the difference between the higher number and the lower number, which will give you your gain or loss.
Ask prices always exceed bid prices. This difference in price is called a spread. This is what the broker will earn as his commission. Brokers make their money based on the volume of trades accomplished and not through individual large commissions.
Spreads are often competitive. Brokers frequently will offer spreads that are small in order to attract more customers and let them keep more profits from trades. The most commonly traded currency pairs, termed as "sticking with the majors," usually have spreads that are much smaller than others since the volume of activity makes up for the decreased brokers fees. - 20896
If you want to purchase a currency pair, you will pay whatever the asking price is. For example, if you look at GBP/USD and you think that the pound will become stronger than the dollar, you would try to buy the pound at a lower rate and sell the dollar since you are predicting it will weaken as against the pound. The pound is considered as the "base currency" and will control the trade, which is called a long position.
The price that you sell at is called the bid price. Using the GBP/USD example, if you predict that the dollar will come back and eventually become stronger than the pound, you would take a short position and sell the pound and buy the dollar. The base currency will still control the direction of the trade.
When you are purchasing the cross currency, the one that is not controlling the trade, all of the signals are reversed in a short sale. The price of the currency pair will then decrease. As you sold the currency pair, you want the price to decrease and will only earn a profit if the price of the pair declined.
Calculations of the number of pips you earn over a short trade are the same as in a long trade to determine your actual profit. It is best to ignore the purchase or sale price and just figure out the difference between the higher number and the lower number, which will give you your gain or loss.
Ask prices always exceed bid prices. This difference in price is called a spread. This is what the broker will earn as his commission. Brokers make their money based on the volume of trades accomplished and not through individual large commissions.
Spreads are often competitive. Brokers frequently will offer spreads that are small in order to attract more customers and let them keep more profits from trades. The most commonly traded currency pairs, termed as "sticking with the majors," usually have spreads that are much smaller than others since the volume of activity makes up for the decreased brokers fees. - 20896
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