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. Why is currency always quoted in pairs?

    When reading currency quotes, you have probably noticed that there is only a single quote for a pair of currencies. Currency ... Read Answer >>
  2. In the forex market, how is the closing price of a currency pair determined?

    The foreign exchange market, or forex, is the market in which the currencies of the world are traded by governments, banks, ... Read Answer >>
  3. Why isn't the EUR/USD currency pair quoted as USD/EUR?

    In a currency pair, the first currency in the pair is called the base currency and the second is called the quote currency. ... Read Answer >>
  4. Why is the U.S. dollar shown on the top of some currency pairs and on the bottom ...

    All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called ... Read Answer >>
  5. Can I trade a currency when its main market is closed?

    In the forex market, currencies from all over the world can be traded at all times of the day. The forex market is very liquid, ... Read Answer >>
Related Articles
  1. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  2. Trading

    Forex Broker Guide

    A Guide To Choosing a Forex Broker
  3. Trading

    Understanding The Spread in Retail Currency Exchange Rates

    Understanding how exchange rates are calculated and shopping around for the best rates may mitigate the effect of wide spreads in the retail forex market.
  4. Trading

    Understanding Forex Quotes

    When trading in forex, all currencies are quoted in pairs. Find out how to read these pairs and what it means when you buy and sell them.
  5. Trading

    The Pros & Cons Of A Forex Trading Career

    Trading foreign currencies can be lucrative, but there are many risks. Investopedia explores the pros and cons of forex trading as a career choice.
  6. Trading

    Top 5 Reasons To Invest In Currencies

    Here's why you should get into the forex market.
  7. Trading

    Forex Trading: A Beginner’s Guide

    As businesses continue to expand to markets all over the globe, the need to complete transactions in other countries’ currencies is only going to grow.
RELATED TERMS
  1. Quote Currency

    The quote currency is the second currency in both a direct and ...
  2. Counter Currency

    The counter currency is the second currency in a quoted currency ...
  3. Currency Pair

    The quotation and pricing structure of the currencies traded ...
  4. Foreign Exchange Market

    The market in which participants are able to buy, sell, exchange ...
  5. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  6. Exchange Rate

    An exchange rate is the price of a nation’s currency in terms ...
Hot Definitions
  1. Donchian Channels

    A moving average indicator developed by Richard Donchian. It plots the highest high and lowest low over the last period time ...
  2. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, ...
  3. Moving Average - MA

    A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out ...
  4. Stop Order

    A stop order is an order to buy or sell a security when its price increases past a particular point in order to limit losses ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Candlestick

    A chart that displays the high, low, opening and closing prices for a security for a single day. The wide part of the candlestick ...
Trading Center