The forex market is ultimately about making money. Not only does this include traders making money but the forex market makers also need to make money. The forex market makers are the firms which facilitate and provide a platform for traders to buy and sell currency. These firms act as forex dealers or brokers. However, the market makers do not charge a commission in the forex markets. Instead forex market makers earn profit from what is known as the bid-ask spread.
Bid vs. Ask Price in Forex
When trading currencies in the forex market there is a bid price and an ask price for each currency pair. The bid price is the price in which the market maker will allow a trader to sell a currency pair. The ask price is the price available for a trader to buy. When a trader buys in the forex market it is known as “going long” while selling a currency pair is known as “going short.”
Spreads and Pips in Forex
Forex market makers gain profits through a spread. This is the difference between the bid and ask price of a currency pair. The bid price is always less than the ask price in a spread in the forex market.
Each currency pair is quoted out to a specific decimal point. How many decimal points will depend upon which currency pair. For example the USD/CAD is quoted out to five digits after the decimal point while the USD/JPY is only quoted out to three decimal points. A pip is the smallest possible decimal point change in price for a specific currency pair. Most currency pairs have a daily fluctuation range of 100 to 150 pips.
Understanding these fundamentals of how the forex market works is essential to anybody looking to succeed in trading currencies. However, these are only the building blocks to a complete forex education. Forex can be quite complicated with various factors influencing the price of currency pairs. Economics, politics, interest rates and even the weather are just some of the variables affecting the forex market.
- Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.