FOREX market quotes dealable real-time bids
and offers for each currency pair. For example,
say that USD/JPY is currently quoted as 106.05/106.08.
The first quote is the bid (the price at which
someone is currently willing to buy dollars
against the yen) and the second quote is the
ask (the price at which someone is willing
to sell dollars against the yen).
trader who wants to buy dollars against the
yen at the market must deal at the offer of
106.08. 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 106.75 (i.e. the dollar
will strengthen against the yen).
orders to buy, whether a market, stop or limit order
deal on the offer. If
a trader wants to sell dollars against the yen at
the market, then he must deal at the bid of 106.05.
This is referred to as "hitting" the bid.
The trader will do this if he believes that USD/JPY
will decline, say, to 105.45 (i.e. the dollar will
weaken against the yen). All orders to sell, whether
a market, stop or limit order deal on the bid.
difference between the bid and offer 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.
bids and offers are "dealable" meaning that
a trader can almost always transact at the quotes
shown. (During very volatile times, there may be some
discrepancy.) This price transparency is a great advantage,
as the trader knows with almost certainty the price
at which a trade can be done, however under extraordinarily
volatile market conditions, order execution may experience
delays resulting in varying spreads.
minimum fluctuation of an exchange rate is referred
to as a "pip". For USD/JPY and EUR/JPY,
a pip is equal to 0.01 and for the other exchange
rates, a pip is equal to 0.0001.