Now we’re getting down to the
brass tacks of actually making trades in the forex market. Before we get ahead
of ourselves, though, it's critical to understand exactly how currency prices
work and what they mean to you as a trader.
Now it is time to look at how
online brokerages display currency prices and what they mean for trade and
order execution. Keep in mind that different online forex brokers use different
formats to display prices on their trading platforms. A thorough picture of
what the prices mean will allow you to navigate different brokers’ platforms
and know what you’re looking at.
Bids and Offers
When you’re in front of your
screen and looking at an online forex broker's trading platform, you’ll see two
prices for each currency pair. The price on the left-hand side is called the bid and the price on the right-hand
side is called the offer (some call
this the ask). Some brokers display
the prices above and below each other, with the bid on the bottom and the offer
on top. The easy way to tell the difference is that the bid price will always be
lower than the offer price.
The price quotation of each bid
and offer you see will have two components the big figure and the dealing price. The big figure refers to the first
three digits of the overall currency rate and is usually shown in a smaller
font size or even in shadow. The dealing
price refers to the last two digits
of the overall currency price and is brightly displayed in a larger font size.
For example, in Figure below the
full EUR/USD price quotation is 1.3671/73. The 1.36 is the big figure and is
there to show you the full price level (or big figure) that the market is
currently trading at. The 71/73 portion of the price is the bid/offer dealing
price.
Spreads
A spread is the difference between the bid price and the
offer price. Most online forex brokers utilize spread-based trading
platforms for individual traders. In one sense, you can look at the spread as
the commission that the online brokers charge for executing your trades. So
even if they say they‘re commission free, they may be earning the difference
when one trader sells at the bid price and another trader buys at the offer
price. Another way to look at the spread is that it’s the compensation the
broker receives for being the market-maker and providing a regular two-way
market.
Spreads will vary from broker to
broker and by currency pairs at each broker as well. Generally, the more liquid
the currency pair, the narrower the spread are and the less liquid the currency
pair, the wider the spread. This is especially the case for some of the
less-traded crosses.
