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Forex Basics: Currency Price

When looking at a currency pair, the first thing you will notice is that there are two different prices. One price is the ask price while the other is the bid price. These prices will always favor the broker, since this is how the broker makes money.

Ask Price

The ask price is the amount you must pay if you would like to purchase that particular currency pair.

In the example below I have all of the Ask prices for each pair boxed in red. Now let’s say your are looking to trade the pair EURUSD. You believe the Euro will strengthen against the U.S. Dollar, meaning on a chart, you should see this pair going up.

In this particular trade you would be essentially purchasing the Euro at a lower price so that you can sell it later at a higher price. Since the Euro is the base currency in this example, it controls the direction of the trade. So in essence, to buy the Euro means to open a long/buy position. Based on the photo in the example, you would be opening a long position, or buying the Euro for EURUSD at the price of 1.2176.

Bid Price

The bid price is the total opposite of the ask price. Let’s look at the pair EURUSD again. Let’s say you have reason to believe the U.S. Dollar will increase in value over the Euro. In this case you would be looking to purchase the U.S. Dollar while selling the Euro.

Remember, the base currency always controls the direction of the trade. Since the Euro is the base currency, we are shorting or selling the pair. We’re selling the base currency (EUR) while buying the quote currency (USD). On a chart, this means you should see EURUSD in a down trend. So, in this example above, we would be selling the pair EURUSD at a price of 1.2174.

Calculating Profits For Long & Short Positions

Calculating the number of pips you earn in a short trade is the same as for a long trade. Just remember to always subtract the lower number from the higher one. The difference is the amount of your gain.

The ask price is always higher than the bid. You have no choice but to buy high and sell low when trading.

What is the spread in forex trading?

The spread is how the broker makes their money. The spread is the difference between the ask price and bid price. You must basically cover the spread before your trade is in profit.

The spread is how brokers compete for our business. The lower the spread is, the more profit you make. Keeping spreads small is a goal of brokers to attract more business from investors like you and I. Spreads are usually the smallest among major currency pairs and among larger brokers.

Now that you are well versed on how to read the price of currency pairs, the next step should be focusing on understanding the spread. What other questions do you have about the price of currency? Drop a comment below.

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