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It reflects the amount of quoted currency that has to be paid in order to buy one unit of the base currency. Remember from the lesson on Forex currency pairs that the base currency is the one in front while the quote currency is the second. The most important thing to remember is that the bid price is used for selling while the ask price is used when buying.
At the end of the day all of these intricacies are taken care of for you by your broker. All you need to know is whether you want to go short sell or go long buy and your broker does the rest. While the major currency pairs and even some crosses have decent spreads, some of the more exotic currency pairs can have wide spreads, creating a large deficit as soon as you enter a trade.
The currency pairs with the lowest spreads are those with the largest daily volume. Compare this to the day trader who can make dozens of trades in a single day and may only be in a trade for a matter of minutes. Make no mistake though, the spread on some of the less-liquid currency pairs can be significant and should certainly be considered before taking a trade, even when trading the higher time frames. We all know that the Forex market is a global market consisting of different trading sessions.
These sessions are:. The bid ask spread for a currency pair can vary depending on the current trading session. For the most part the bid ask spread will be the lowest during the London and New York sessions as these carry the largest trading volume. However there is a three hour window that occurs immediately after the New York session closes and before Tokyo opens in which the spreads can considerable.
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This is especially true for some of the currency crosses and exotic currency pairs but can also effect the major currency pairs. In fact as a general rule you should always check the bid ask spread before entering a trade regardless of the current trading session. Before we close out this lesson, here are a few key points to keep in mind when it comes to the bid ask spread. Apply market research to generate audience insights.
Bid and Ask Price Meaning in Forex
Measure content performance. Develop and improve products. List of Partners vendors. The bid-ask spread informally referred to as the buy-sell spread is the difference between the price a dealer will buy and sell a currency. However, the spread, or the difference, between the bid and ask price for a currency in the retail market can be large, and may also vary significantly from one dealer to the next. Understanding how exchange rates are calculated is the first step to understanding the impact of wide spreads in the foreign exchange market.
In addition, it is always in your best interest to research the best exchange rate. The bid price is what the dealer is willing to pay for a currency, while the ask price is the rate at which a dealer will sell the same currency. For example, Ellen is an American traveler visiting Europe. The cost of purchasing euros at the airport is as follows:.
The higher price USD 1. Suppose also that the next traveler in line has just returned from her European vacation and wants to sell the euros that she has left over. Katelyn has EUR 5, to sell.
Bid/Ask Spread
She can sell the euros at the bid price of USD 1. When faced with a standard bid and ask price for a currency, the higher price is what you would pay to buy the currency and the lower price is what you would receive if you were to sell the currency. An indirect currency quote expresses the amount of foreign currency per unit of domestic currency. The currency to the left of the slash is called the base currency and the currency to the right of the slash is called, the counter currency , or quoted currency.
Consider the Canadian dollar. This represents a direct quotation, since it expresses the amount of domestic currency CAD per unit of the foreign currency USD. Next, consider the British pound. This represents an indirect quotation since it expresses the amount of foreign currency USD per unit of domestic currency GBP. When dealing with currency exchange rates, it's important to have an understanding of how currencies are quoted.
Understanding Spreads When Exchanging Foreign Currency
Suppose there is a Canadian resident who is traveling to Europe and needs euros. The calculation would be different if both currencies were quoted in direct form. In general, dealers in most countries will display exchange rates in direct form, or the amount of domestic currency required to buy one unit of a foreign currency.
- Bid-Ask Spreads in the Foreign Currency Exchange Market.
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When dealing with cross currencies , first establish whether the two currencies in the transaction are generally quoted in direct form or indirect form. If both currencies are quoted in direct form, the approximate cross-currency rate would be calculated by dividing "Currency A" by "Currency B. If one currency is quoted in direct form and the other in indirect form, the approximate cross-currency rate would be "Currency A" multiplied by "Currency B.
When you calculate a currency rate, you can also establish the spread, or the difference between the bid and ask price for a currency. More importantly, you can determine how large the spread is. If you decide to make the transaction, you can shop around for the best rate. Rates can vary between dealers in the same city. Spending a few minutes online comparing the various exchange rates can potentially save you 0.
Airport kiosks have the worst exchange rates, with extremely wide bid-ask spreads. It may be preferable to carry a small amount of foreign currency for your immediate needs and exchange bigger amounts at banks or dealers in the city. Some dealers will automatically improve the posted rate for larger amounts, but others may not do so unless you specifically request a rate improvement.
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