Well, the whole system of quoting prices is very simple.
Currencies are traded in pairs. All possible pairs have already been created
and available for trading. Other words, you will trade not a separate currency,
but the pair and the quote is an exchange rate one currency to another.
For simplicity, let’s skip separate quoting for buy and
sell (we will talk about it a bit later), and use just the first column - what
does it mean?
So that is the answer – GBP/USD and EUR/USD are currency
pairs. When you make a transaction on FOREX you’re simultaneously buying one
currency and selling another. For example, buying EUR/USD means Buy EUR and
Sell USD. The first placed currency shows what are you buying or selling, and
second one shows what you’re getting instead. Selling EUR/USD means that you‘re
selling EUR and buying, i.e. “getting instead” USD.
When you’re explaining that, I have an association with
pair of scales. On the one scale is the first currency, say EUR, on the other
one is USD. And exchanging rate, i.e. equilibrium is fluctuating all the time,
based on which currency is getting stronger right now. Let’s
see… we already know pairs like USD/USD or EUR/EUR do not make any sense, so I
suppose that we can create only three pairs – EUR/USD, GBP/USD and EUR/GBP.
Also we can make reverse pairs, such as USD/EUR, for example, but this will be
the same pair as EUR/USD. The only difference will be that it will show how
many Euros I should pay for 1 buck, instead of initially how much bucks I
should pay for 1 EUR. If, for example EUR/USD rate is 1.35, then USD/EUR is
1/1.35 or about 0.74. It means that I should pay about 0.74 EUR for 1 buck.
It’s a simple task. I just have to add just pairs that
include CAD. EUR/USD, GBP/USD and EUR/GBP we have already, so I need to add
USD/CAD, EUR/CAD and GBP/CAD.
During recent times, the economies of emerging markets have
becomes stronger, the trading turnover is rising, so on FOREX markets, there is
more demand appeared for exchanging emerging market’s currencies as between
themselves and with major currencies. For example, now we can trade on FOREX
such currencies as Brazilian real, South Africa’s rand, Mexican peso, Thai
baht, Russian Ruble, Singaporean dollar, Chinese Yuan, etc. Usually they are
traded to US Dollar and sometimes with other major currencies. Occasionally,
they are traded with each other. There is much will depend from your FOREX
broker, because not all of them provide the possibility to trade exotic pairs
or even their crosses. But, in general, these pairs exist and can be traded.
ue to lower size on economies of Emerging markets and their
international Trade turnover, the trading volumes with exotic pairs is lower
compared to majors and crosses. Besides, the transaction cost for trading them
is usually higher.
Let’s return to quote board in exchange centre:
Currency
We Buy at
We Sell at
1 EUR
1.35 USD
1.37 USD
1 GBP
1.65 USD
1.67 USD
See – there is a double quoting, one price is for buying
the foreign currency and another for selling it. The difference between buy and
sell price calls “bid/ask spread”. If you will buy Euro here for 1.37 (because
bank sells Euro for 1.37 currently, this is “Ask” price) and at once sell it at
1.35 (because bank buys Euro only for 1.35, this is “Bid” price) you will get a
$0.02 loss – that’s your transaction cost. In fact, you do nothing, because you
stand with the same position - you Buy Euro and Sell Euro at the same time.
Even so, you’ve just lost 2 cents. So, for major pairs the Bid/Ask spread on
FOREX is very tight - usually 0.0001-0.0003, but for exotic pairs it’s much
wider. It means that if you would like to make the same transaction with Thai
baht, for example, you can get greater loss instead of 2 cents as it stands
with Euro transaction. It can be 50 cents or even buck.
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