Reading FOREX Quotes- The Bid-Ask Spread

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bid-ask spread

We have discussed that FOREX quotes are expressed in pairs of two currencies and the meaning of the base and quote currency.  However when you go to exchange FOREX at a given time you will always see two values instead of 1.

Bid (Sell) is the price at which you would Sell the currency pair

Ask (Buy) is the price at which you Buy the currency pair

-The difference between the two is called the Spread (Bid-Ask Spread)

The reason the spread exists is because this is how the company you are trading with makes its profits. You have to Buy (Ask) at a greater price and Sell ( Bid) at a lower price .

YOU WANT TO SEEK A BROKER WITH THE LOWEST SPREAD AS POSSIBLE AS IT WILL COST YOU LESS TO COMPLETE THE TRANSACTION (BUY AND SELL)

bid-ask spread

Example: Mark from USA want  to visit Great Britain so he wants to exchange his USD with GBP

We use the GBP/USD rates from the picture above .

Mark needs 1.6111 USD to Buy 1 GBP.

Mark wants to buy 10,000 GBP so he pays 16,111 USD.  (=10,000 x 1.6111 USD )

A minute later he hears his UK visa was rejected and can no longer fly there.

Therefore he wants Sell his GBP to get back his USD.

He Sells each GBP at 1.6108 USD

His 10,000 GBP give him back 16,108 USD (=10,000 x 1.6108 USD )

Therefore Mark eventually lost 3 USD out of these two transactions because of the 0.0003 spread. The 3USD was the profit the company Mark exchanged his USD made.

He paid 16,111 USD initially but only got back 16,108 USD.

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