In our last lesson we looked at what an increase or decrease in the quote for a particular currency pair means to us as traders of the forex market. In today's lesson we are going to continue our discussion on the logistics of forex trading with a look at what the bid and ask for each currency pair means. In most financial markets there are always two prices for a particular financial instrument at any one time which are known as the bid and the ask price. The bid price is the price at which the market maker (the actual entity that is on the other side of your trade) will buy and therefore the rate at which you the client can sell. The ask price is the price at which a market maker will sell and therefore the rate at which you the client can buy.

The difference between the rate at which you can sell (the bid) and the rate at which you can buy (the ask) is referred to as "the spread". Market makers such as the people that sit on the floor of the New York Stock Exchange in the stock market make their money from the spread, or buy charging traders more when they sell a stock than they do when they buy a stock.

Although this is changing with the advent of online trading platforms, the concept of a bid and ask price is foreign to most, because traders are most familiar with the stock market where they have traditionally called their brokers whenever they wanted to place a trade who then placed the trade on their behalf with the market maker. When they call their broker they say they would like to buy x amount of xyz stock, the stock broker simply gives the client the ask price for that stock since the client has asked to buy.
As you can see here however on this online stock trading platform, when requesting a quote for Jet Blue stock the quote window returns two prices, showing both the bid and the ask.

The stock market is in the process of going from indirect access where clients trade through a broker to get to the market maker to a more direct access environment where online trading platforms allow them to trade directly with the market maker. As the forex market for individual traders really started with the internet, the market did not have to go through the same transition. Because of this most forex trading platforms show both the bid and the ask price and make their money through the spread, charging clients zero commissions to trade.

Now that we understand this lets login to our real-time demo trading platforms and look at some examples. If you have not registered for a free demo trading account yet I encourage you to pause this video now and click the free demo registration link above this video if you are watching on InformedTrades.com or in the description section of this video if you are watching on Youtube so you can follow along as well.

Once logged into the platform you will see the quotes window where you can see that the current bid price for the EUR/USD currency pair is 1.5760 and the current ask price is 1.5763. This means that currently you can sell the EUR/USD at 1.5760 and buy at 1.5763. The difference between those prices is the spread.

Moving to the right across the currency window we see that the USD/JPY currency pair is currently trading at 101.89 by 92 which is another way of saying that the bid for the USD/JPY is and the ask is 101.89 and the ask is 101.92 . This means that we can currently sell USD/JPY at 101.89 and buy at 101.92.

As some of you may have noticed, there is a fifth digit there that I have not included in my examples. Don't be confused about this at this point as we are going to learn about in a future lesson.

Now that we have a solid understanding of currency pairs, the currency quote, and the bid and ask prices the next thing that we are going to do is look at actually placing some currency trades. With this in mind the homework assignment for tonight is to place a trade on your demo trading account which would reflect the opinion that you think that the EUR is going to Strengthen against the US Dollar. Feel free to post the answer to what you do in this situation in the comments section below as well as any questions you may have, and good luck with your trading!

Ok, since I'm supposed to think that the EUR will strengthen against the USD, looking at the EUR/USD currency pair, I should buy this.

Fumbling through the order, I bought 100k at 1.57765. There were lots of options that I didn't understand (like how the margin works, what type of order to make, what is a "pip", etc.), but I'm sure you'll cover those in later lessons.

Rocketman7

Hey Rocketman7,

You are right on there again and definately going to cover all of the things you mentioned in upcoming lessons.

Best Regards,
Dave

I'm using a 1 min. chard of the EUR/USD.
At 21:32 the Euro topped at $1.54619 USD and then weakened.
At 22:04 it began to move up from a base in the $1.54479 range.
At 22:05 bought 100 @ $1.54520 in hopes of the Euro strengthening
At 22:28 stop triggered at @ $1.54479 for a -41.00 loss when the Dollar strengthened.

Is that right?

JCV




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Hi JCV,

Glad to see you are making some progress with the platform.

Yes I see this.

Yes I see this.

Yes if you thought the Euro was going to strengthen then the correct move was to buy to execute that idea.

The loss calculation with the numbers above is correct however I show the market around 1.5464 at 22:28. Do you have the time right there or am I looking at something wrong?

Best Regards,
Dave

I show the EUR/USD on 6/12/08 @ 22:28
Open: 1.54532
Close: 1.54466
High: 1.54532
Low: 1.54451

I think I'm reading it correctly . . . but I'm new to all this.

I was stopped out at $1.54479

Is this right?

Hi JCV,

I am showing the market up around 1.5460 at that time however I am using a 3rd party package so there is a chance that my data is off during that time. Is that a demo trade or a live trade as sometimes the feeds can differ there too.

Best,
Dave

I was using an FXCM demo account.

Here is what my order looked like (I copied it directly from the platform)
12835991 Account: ######## EUR/USD 100 B 1.54520 1.54479 -4.1 -41.00 0.00 6/12/2008 22:05 6/12/2008 22:28

Thanks,

James

Hi James,

Yes that is correct then.

Best Regards,
Dave