Forex Trading Basics | Dealing on Forex Bids and Offers.

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FOREX TRADING BASICS

DEALING ON THE FOREX BID & ASK

Forex prices carried across the trading platform are, under normal conditions, dealable real-time bids and asks, also called offers. For example, say that USD/JPY is currently quoted as 98.05/98.08. The first quote is the bid meaning the price at which the counterparty is currently willing to buy dollars - the base currency - against the yen and the second quote is the ask or the price at which the counterparty is willing to sell dollars against the yen.

A trader who wants to buy dollars against the yen at the market must deal at the ask or offer of 98.08. This is referred to as "lifting" or "paying" the offer. The trader will do this if he believes that USD/JPY will increase, say, to 98.75 meaning that the dollar will strengthen or appreciate against the yen.

Continuing with the above example, if a trader wants to sell dollars against the yen at the market, then he must deal at the bid of 98.05. This is referred to as "hitting" the bid. The trader will do this if he believes that USD/JPY will decline, say, to 97.45 meaning that the dollar will weaken or depreciate against the yen.

FOREX LIMIT AND STOP ORDERS

A forex limit order is used when the trader wants to buy the base currency at a price that is below the current offer, or sell the base currency at a price that is above the current bid. Limit orders to buy deal on the quoted offer and must be set at a price that is below the current offer. Limit orders to sell deal on the quoted bid and must be set at a price that is above the current bid.

A forex stop order is used when the trader wants to buy the base currency at a price that is above the current offer, or sell the base currency at a price that is below the current bid. Forex stop orders to buy deal on the quoted ask and must be set at a price that is above the current ask or offer. Forex stop orders to sell deal on the quoted bid and must be set at a price that is below the current bid.

THE BID/ASK SPREAD

The difference between the bid and ask is referred to as the spread and represents a cost of transacting in the forex market. The more liquid is a particular currency pair, the smaller will be the spread and hence, the cost. All other financial markets - bonds, equities, and futures - also have a spread, so this is not something particular to the forex market.

The most active currency pairs, namely, the EUR/USD, USD/JPY, USD/CHF, EUR/JPY and AUD/USD may have a spread of just 3 or 4 pips though this can increase during times of heightened market volatility or general low liquidity. The less active currency pairs, such as those involving the New Zealand dollar, may be quoted with a bid/ask spread of 25 pips or more.

ACCOUNT MARKET/LIQUIDATION VALUE

The retail forex trading platform provides an updated, real-time market or liquidation value of the trader's account. This is calculated as the cash in the account plus the liquidation value of all open currency positions. Long currency positions are valued at the market bid while short currency positions are valued at the market ask since these are the respective prices should all open positions be immediately closed.

Should account market value fall below the prescribed used margin level for the sum total of all open currency positions, then a margin call may be issued and all open positions will be automatically closed by the trading platform.

Fractional Pips. Traditionally, forex spreads were denoted in pips, the smallest unit of price. Fractional pips or pipettes provide an even finer detail in forex pricing. One pipette is 1/10 of a regular pip. So the EUR/USD quote above is 1.5043 bid and 1.5045 6/10 ask or 1.50430/56. The spread of 2.6 pips is equal to 26 pipettes. The EUR/JPY spread shown above is 37 pipettes. Fractional pip pricing, when available, is usually only available on the popular currency pairs.

Automatic Rollovers. In the spot forex market, trades settle by physical delivery in two business days unless the position is rolled over to the next value date. By convention, all open forex positions are automatically rolled to the next settlement date at 17:00 Eastern Time so the trader need never worry over delivery. Rollover or "cost-of-carry" involves the applying of a daily debit or credit to a trading account based on the interest rate differential between the two currencies in the pair being traded. In the majority of cases, if a trader is short the currency bearing the higher interest rate, then their account will be debited and if they are long, then their account will be credited. On Wednesdays, this adjustment is three times the usual amount to account for settlement of trades through the weekend period. Also, when there are bank holidays in either settlement country, the normal roll schedule does not apply.

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Keywords: forex trading basics, forex education, forex bid, forex ask, forex offer, forex dealing, forex price, forex spread, forex pip, forex pipette, forex rollover
Abstract: This part of our forex education tutorial covers dealing on forex bids and offers.