When you open a new margin account with a forex broker, you must deposit a minimum amount with that broker. These pairs exhibit erratic price behavior since the trader has, in effect, initiated two USD trades.įor example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling GBP/USD.Ĭross-currency pairs frequently carry a higher transaction cost. Transaction cost (spread) = Ask Price – Bid Price Cross CurrencyĪ cross-currency is any currency pair in which neither currency is the U.S. The formula for calculating the transaction cost is: Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair.įor example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips. The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade. Quote ConventionĮxchange rates in the forex market are expressed using the following format:īase currency / Quote currency = Bid / Ask Transaction Cost In this example, USD/JPY has a 4-pip spread. These digits are often omitted in dealer quotes.įor example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as “30/34.” The “big figure quote” is the dealer expression referring to the first few digits of an exchange rate. The spread is the difference between the bid and ask price. The ask price is also known as the offer price. This means you can buy one euro for 1.2815 U.S. It is shown on the right side of the quotation.įor example, in the quote EUR/USD 1.2812/15, the ask price is 1.2815. The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market.Īt this price, you can buy the base currency. This means you sell one British pound for 1.8812 U.S. It is shown on the left side of the quotation.įor example, in the quote GBP/USD 1.8812/15, the bid price is 1.8812. The bid is the price at which the market is prepared to buy a specific currency pair in the forex market.Īt this price, the trader can sell the base currency. Some brokers quote fractional pips, or pipettes, for added precision in quoting rates.įor example, if EUR/USD moved from 1.32156 to 1.32158, it moved 2 pipettes. Notable exceptions are pairs that include the Japanese yen where a pip equals 0.01. Therefore, if the quote currency in any pair is USD, then one pip always equals 1/100 of a cent. In this instance, a single pip equals the smallest change in the fourth decimal place – that is, 0.0001.
0 Comments
Leave a Reply. |