Buy and sell forex explained
Did you find what you were looking for? Before now, while speaking about quotes, we intentionally used only Forex current spot exchange rates for simplification of understanding the website content. However, Forex quote is built up by two rates two prices — buy rate bid and sell rate ask. Buy rate is a price at which the party setting the quote agrees to buy the base currency from you.
Sell rate is a price at which the party offering the quote agrees to sell the base currency to you, i. In this kind of explanation, it is the party offering you the quote, that buys and sells, not you. In other words, if you are going to buy the base currency of the quote, it is necessary to look at the purchase price or ask.
If you intend to sell the base currency of the quote, look at the selling price or bid. For example, if you are going to purchase U. If you want to get Japanese yens by selling U. Graphic representations of rates differ depending on the trading platform provided by the Internet brokers. As big figures rarely change, they are often not displayed in a sell rate ask of official quotes on Forex. For example, the mentioned above U. The difference between bid and ask prices right and left sides of quote is called spread.
Spread is the basis of receiving profit for the party setting the quote. You sell USD and receive x If someone comes there now and buys these USDthe sum of x From this example it becomes clear that the exchange office earns on the opposite currency transactions, i.
This principle is the basis of the broker profit receiving on Forex. We will learn to calculate the profit of the executed deal in the currency needed in other chapters. Now it is important to realize, that there are two rates in every Forex quote buy rate and sell rate and the difference between these rates is called spread and is calculated in pips. So, spread is a source of profit for the party offering the quote. That is why retail brokers, that are providing private investors with an access to on-line Forex trade, do not take commissions as a rule, they get benefit from spreads instead.
In the following chapters where the process of opening and closing Forex positions will be discussed, we will describe in details why high spread is not favourable for a private investor. Now it is necessary to understand that choosing a broker first of all you should pay attention to the size of spread: Who sets buy and sell rates? Where are they taken from? Currency quotes are made up only by supply and demand on the currency market.
The main influence on exchange rates is exerted by major active participants of Forex market earlier we have discussed the classification of Forex market participants. Following the main change of the rate, large passive participants and millions of small traders also influence the further change of rates.
Thus, if the majority of market participants try to sell the particular currency, its price falls. If the main tendency is to buy this currency, its price grows. So, the trader's aim is to detect this tendency in time.
For currency market participants the spread size is not always identical. For the main Forex market participants which open deals for millions of U. For smaller Forex players, who are dealing with less significant sums of money, the spread size is bigger. So, in exchange offices the spread can reach hundreds of pips. In the conditions of unstable and fast changing rate the size of spread can increase. Thus during the rush moments of buying or selling currency, caused by publication of important economic indicators the elements of fundamental analysis will be described in details later onon-line brokers are sometimes increasing the size of spread, which should also be taken into account while choosing the Internet broker as the broker with the fixed spread is preferable.
The size of spread can depend on market liquidity of a certain currency. If the currency does not trade actively on Forex, the spread for the corresponding quotes can be higher. This is especially characteristic of the interbank currency exchange when banks exchange "exotic" low-liquid currencies of the third world.
Private investors basically work on Forex with high-liquid currencies. For major participants of currency market the spread size can depend on the sum of the deal. If the sum differs much from average market sums for particular currency, the spread can be bigger.
Finally relations between contractors of the deal can influence the size of spread. If there is strong business relationship between the deal parties, they can agree to decrease the spread. And on the contrary, if the bank's dealer does not want to conduct operation with a certain contractor, the spread can intentionally be overestimated, forcing the contractor to refuse from the deal. Thus, buy price bidsell price ask and the size of spread in the quote are the key concepts for working on Forex.
And for a private investor it is necessary to understand these meanings. Working on Forex all decisions should be taken quickly, so problems with understanding the basic concepts are not acceptable! A private investor should not be frightened by the fact, that operations on Forex, as a rule, are conducted for USDand even USD 1, The principle of margin trading which will be described in the next chapters, allows private investors making deals with the amounts that are hundreds times more than the funds they have.
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