There are what is known as the bid price and ask price in the Forex market. As you can imagine, the ask price will always be higher than the bid price. The broker makes his money off the difference in pricing and because of that they will always be in his favor. Trades in Forex are different from stock trades because more profitable trades are made when buying high and selling low with fast moving currency pairs.
When entering into a trade for a currency pair, you will pay the ask price. For example, with the popularly traded GBP/USD, if you think the pound is going to rise in price against the dollar, you would take a long position or buy the pound and sell the dollar, which is going to decrease in value against the pound. In this instance, the pound controls the trade and is termed the base currency.
The price that you sell at is called the bid price. Using the GBP/USD example, if you predict that the dollar will come back and eventually become stronger than the pound, you would take a short position and sell the pound and buy the dollar. The base currency will still control the direction of the trade.
When you are purchasing the cross currency, the one that is not controlling the trade, all of the signals are reversed in a short sale. The price of the currency pair will then decrease. As you sold the currency pair, you want the price to decrease and will only earn a profit if the price of the pair declined.
Calculations of the number of pips you earn over a short trade are the same as in a long trade to determine your actual profit. It is best to ignore the purchase or sale price and just figure out the difference between the higher number and the lower number, which will give you your gain or loss.
Ask prices always exceed bid prices. This difference in price is called a spread. This is what the broker will earn as his commission. Brokers make their money based on the volume of trades accomplished and not through individual large commissions.
Spreads can be quite competitively priced. When the spread is small, the trader will have more profit. Keeping the spread smaller helps the brokers to attract more traders. Spreads are usually tiny among the widely traded currency pairs, also referred to the majors.
When entering into a trade for a currency pair, you will pay the ask price. For example, with the popularly traded GBP/USD, if you think the pound is going to rise in price against the dollar, you would take a long position or buy the pound and sell the dollar, which is going to decrease in value against the pound. In this instance, the pound controls the trade and is termed the base currency.
The price that you sell at is called the bid price. Using the GBP/USD example, if you predict that the dollar will come back and eventually become stronger than the pound, you would take a short position and sell the pound and buy the dollar. The base currency will still control the direction of the trade.
When you are purchasing the cross currency, the one that is not controlling the trade, all of the signals are reversed in a short sale. The price of the currency pair will then decrease. As you sold the currency pair, you want the price to decrease and will only earn a profit if the price of the pair declined.
Calculations of the number of pips you earn over a short trade are the same as in a long trade to determine your actual profit. It is best to ignore the purchase or sale price and just figure out the difference between the higher number and the lower number, which will give you your gain or loss.
Ask prices always exceed bid prices. This difference in price is called a spread. This is what the broker will earn as his commission. Brokers make their money based on the volume of trades accomplished and not through individual large commissions.
Spreads can be quite competitively priced. When the spread is small, the trader will have more profit. Keeping the spread smaller helps the brokers to attract more traders. Spreads are usually tiny among the widely traded currency pairs, also referred to the majors.
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