When it comes to currency trading, understanding forex prices is imperative. You also need to understand some other jargon such as the spread, pips and price quotes among others.
The Spread
Spread in forex trading is the difference between the Bid and the Ask. It is effectively the cost of trade. Although we are witnessing a move towards commission based trading as a result of market execution, there is typically no extra broker commission involved in trading the Forex market. Forex prices are displayed in for of a Bid and Ask spread. Both Bid and Ask serve as the prices that are comparable to other financial products.
The Bid
This Bid can be described as the price at which a trader is able to vend a particular currency pair. However, the Bid price of a currency pair is the lower price in quote at all times.
The Ask
The price at which traders are able to buy a currency pair is referred to as the Ask also called Offer sometimes.
Pips
Market increments are always measured in Pips – Percentage in Point. If you are actually trading forex from a 4 digit price feed, a Pip is the last digit in the value of a currency pair. Each and every forex currency pairs, with the exception of the Japanese Yen, measure Pip from the 4th decimal place.
Price Quotes
Understanding Forex prices will also entail the reading of Forex quote that may be a bit confusing initially. Nevertheless, if you remember that the value of the base currency is always one and that the first currency listed is the base currency, it is really quite simple.
In a quote of GBP 1.5000 for instance, 1 GBP is equal to 1.5000 USD. Comparatively, the GBP has appreciated while the other currency in the pair (usually known as the quote currency) has weakened, when the GBP is the base unit and a currency pair’s price increases. If the GBP/USD rises from 1.5000 to 1.5100 or 100 pips, using the above illustration as a reference, the GBP is stronger for the reason that it will now buy more USD than before.
What Influences Price?
Understanding of Forex prices is not complete without knowing what influences price. It is noteworthy to know that the forex prices and markets are mainly influenced by investment flows and international trade. It can also be influenced by similar factors that influence bond and equity markets to a lesser extent, inflation, political and economic conditions, especially interest rates as well as political instability among others. Although economic factors have long-term effects, it is instantaneous reaction that brings about daily price volatility that makes forex trading very striking to the intra-traders.
Understanding forex prices is quite necessary for a successful currency trading, apart from knowing the jargons and strategies involved. Trading currencies however is a means of protection against adverse movements in both the bond and equity markets. Remember the fact that trading the off-exchange foreign currency market is a risky form of trading. Therefore, you are advised to invest only a small portion of your risk capital in this market.
If you are looking for a Forex/CFD broker, Plus500 and Avatrade are two of the most reputable brokers around.