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Unit 14: Currency/Forex Market

EUR/JPY. These currency pairs expand the trading possibilities in the forex market, but it is Notes
important to note that they do not have as much of a following (for example, not as actively
traded) as pairs that include the U.S. dollar, which also are called the majors.

Bid and Ask

As with most trading in the financial markets, when you are trading a currency pair there is a bid
price (buy) and an ask price (sell). Again, these are in relation to the base currency. When buying
a currency pair (going long), the ask price refers to the amount of quoted currency that has to be
paid in order to buy one unit of the base currency, or how much the market will sell one unit of
the base currency for in relation to the quoted currency.
The bid price is used when selling a currency pair (going short) and reflects how much of the
quoted currency will be obtained when selling one unit of the base currency, or how much the
market will pay for the quoted currency in relation to the base currency.
The quote before the slash is the bid price, and the two digits after the slash represent the ask
price (only the last two digits of the full price are typically quoted). Note that the bid price is
always smaller than the ask price. Let’s look at an example:
USD/CAD = 1.2000/05

Bid = 1.2000
Ask = 1.2005
If you want to buy this currency pair, this means that you intend to buy the base currency and are
therefore looking at the ask price to see how much (in Canadian dollars) the market will charge
for U.S. dollars. According to the ask price, you can buy one U.S. dollar with 1.2005 Canadian
dollars.
However, in order to sell this currency pair, or sell the base currency in exchange for the quoted
currency, you would look at the bid price. It tells you that the market will buy US$1 base
currency (you will be selling the market the base currency) for a price equivalent to 1.2000
Canadian dollars, which is the quoted currency.

Whichever currency is quoted first (the base currency) is always the one in which the transaction
is being conducted. You either buy or sell the base currency. Depending on what currency you
want to use to buy or sell the base with, you refer to the corresponding currency pair spot
exchange rate to determine the price.

Spreads and Pips

The difference between the bid price and the ask price is called a spread. If we were to look at the
following quote: EUR/USD = 1.2500/03, the spread would be 0.0003 or 3 pips, also known as
points. Although these movements may seem insignificant, even the smallest point change can
result in thousands of dollars being made or lost due to leverage. Again, this is one of the
reasons that speculators are so attracted to the forex market; even the tiniest price movement can
result in huge profit.
The pip is the smallest amount a price can move in any currency quote. In the case of the U.S.
dollar, euro, British pound or Swiss franc, one pip would be 0.0001. With the Japanese yen, one
pip would be 0.01, because this currency is quoted to two decimal places. So, in a forex quote of
USD/CHF, the pip would be 0.0001 Swiss francs. Most currencies trade within a range of 100 to
150 pips a day.

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