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. What assumptions are made when conducting a t-test?

    Learn what a t-test is, and discover the five standard assumptions that are made regarding the validity of sampling and data ...
  2. How are double exponential moving averages applied in technical analysis?

    Learn more about double exponential moving averages (DEMAS), and find out how traders commonly use DEMAs in technical analysis ...
  3. What are the goals of covered interest arbitrage?

    Learn the three major goals of covered interest arbitrage and increase your comprehension of the foreign exchange trading ...
  4. How do you know where on the oscillator you should make a purchase or sale?

    Learn more about oscillator indicators, technical momentum measures that are used by traders to predict potential market ...
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. Forex Strategies

    Can Forex Trading Make You Rich?

  2. Chart Advisor

    ChartAdvisor for July 30 2015

  3. Trading Strategies

    Microsoft's Game of Catch-Up With The ...

  4. Charts & Patterns

    Avoid The Perfection Trap In Trading

  5. Chart Advisor

    Four Great Stocks for Day Traders

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!