When you get started in the foreign exchange market, all of the terms and lingo can be a little bit confusing for the average person. When you log into your trading platform for the first time, it may seem like a lot of bells and whistles, and none of them make sense. As a result, the area of Forex pricing can seem a bit overwhelming at times. If you are confused about how currency pairs are priced and how this affects you as a trader, you’re not alone. Here are a few things to consider about Forex pricing and how it works.
When trading in the foreign exchange market, you’re always going to be dealing with currency pairs. Two currencies are grouped together and they call them a currency pair. When you make a transaction, you are actually buying one currency and selling another. The price that you see on the chart is essentially the exchange rate between these two currencies. The rate is telling you how many of one currency it would take to get one unit of the other.
Bid and Ask
When you look at your trading platform, you will typically see a list of prices up at the top left-hand side of the page. You’ll notice that each currency pair has two different prices and they’re both always fluctuating. The first price that you see is the bid price and the second is the ask price. The bid price is the price that buyers are willing to pay for a currency pair. The ask price is the price that sellers are willing to sell at. The prices are a little bit apart. Usually the difference is only a few units apart. These units are referred to as “pips.”
The difference between the bid price and the ask price on the currency pair is known as the spread. When you place an order, the broker will fill the order at either the bid or the ask price and then keep the spread. This means that the spread is essentially the transaction costs that you realize on each trade that you take. This amount is still much cheaper than what most people pay in commissions to a regular stock broker or a similar investment broker. However, these costs can add up over time.
Not every broker provides traders with the same spreads. In fact, the spreads in the market can vary significantly from one broker to the next. If you are a trader, you should pay special attention to the spreads that your broker is quoting you before you agree to anything. You want to minimize your transaction costs so that you can keep more of the profit that you earn in the market. Depending on your trading strategy, it may negatively affect your ability to make money. If you shoot for very small profit targets, you have to wait on the market to move even farther to get the profit that you require after the spread has been recouped.
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