A:

First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms of their price in another currency.

In order to express this information easily, currencies are always quoted in pairs (e.g. USD/CAD). The first currency is called the base currency and the second currency is called the counter or quote currency (base/quote). For example, if it took C$1.20 to buy US$1, the expression USD/CAD would equal 1.2/1 or 1.2. The USD would be the base currency and the CAD would be the quote or counter currency.

Now that we know how currencies are quoted in the marketplace, let's look at how we can calculate their spread. Forex quotes are always provided with bid and ask prices, similar to what you see in the equity markets. The bid represents the price at which the forex market maker is willing to buy the base currency (USD in our example) in exchange for the counter currency (CAD). Conversely, the ask price is the price at which the forex market maker is willing to sell the base currency in exchange for the counter currency. Forex prices are always quoted using five numbers; so, for this example, let's say we had a USD/CAD bid price of 120.00 and an ask of 120.05. Thus, the spread would be equal to 0.05, or $0.0005.

To learn about the basics of the forex market, check out A Primer On The Forex Market and Getting Started In Forex.

RELATED FAQS

  1. How can I spot trading opportunities looking at year-to-date (YTD) performance?

    Discover how to spot trading opportunities by looking at year-to-date performance. YTD performance is an effective tool to ...
  2. How does Net Operating Profit After Tax give a clearer view of the operating efficiency ...

    Understand how net operating profit after tax gives a clearer view of the operating efficiency of a company in relation to ...
  3. Which is better: dollar cost averaging or value averaging?

    Compare the two investment strategies of dollar cost averaging and value averaging, and learn which one usually generates ...
  4. Why is the Nasdaq more volatile than the NYSE?

    Learn about the stocks that are traded on the Nasdaq stock exchange, and discover the Nasdaq's relative volatility level ...
RELATED TERMS
  1. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  2. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  3. Indicator

    Indicators are statistics used to measure current conditions ...
  4. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  5. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  6. ICE LIBOR

    See LIBOR

You May Also Like

Related Articles
  1. Chart Advisor

    3 Ways To Trade The Bounce In Coal

  2. Chart Advisor

    How Investors are Profiting from Cyber ...

  3. Chart Advisor

    Buy These Stocks on The Pullback

  4. Technical Indicators

    Using Bullish Candlestick Patterns To ...

  5. Chart Advisor

    3 Ways To Trade Oil's Move Lower

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!