Sunday, May 10, 2009

BID and ASK prices




It's understood that any transaction is executed at exact price, while Quote Spread Sheet table has three prices for each price, e.g.:
Each Forex market participant in each transaction acts as either SELLER of the currency, or BUYER. And the seller offers the higher price, e.g. GBPUSD at 2.0254, and the buyer asks the lower price, e.g. GBPUSD at 2.0250. Thus, the offer price à seller is called ASK, and he price of buyer — BID. Consequently, if you assume GBPUSD will appreciate (your chart shows that GBPUSD curve goes higher), than you decide to buy pound while its cheaper, in order to sell it higher. You can buy (this operation is called BUY) only from the seller who will offer it at ASK price. When you sell pound (this operation is called SELL), the buyer will offer for it BID price (it works for all currencies). This clearly implies that if you OPENED position (the operation is called OPEN), i.e. executed BUY GBPUSD, and want to CLOSE it right away (the operation is called CLOSE), i.e. to sell the just bought pounds, you can make it only with the loss equal to the one in any foreign exchange office. Consequently, in order to get profit, the move of the currency price in the desired direction should exceed the difference between BID and ASK. The third value is called LAST — it represents the average value between the last BID and ASK at Forex market. As stipulated in Section 3, only currencies with the direct quote appreciate when charts go higher. It's evident that the rule, under which the BUY operation during move higher brings profit for some currencies and loss for others, will be inconvenient. Thus, upon execution BUY operation for reverse quote currencies, you buy not the currency, but US Dollar, and the currency is sold. For example, BUY USDCHF at 1.1724 buys 100,000 US Dollars at 117,240 Swiss Franks. Thus, BUY operation always brings profit when the chart moves up, and SELL operation — when chart moves down. To sum up, OPEN BUY (up) executes at ASK price, and CLOSE — at BID price; OPEN SELL (down) — at BID price, and CLOSE — at ASK price. Sometimes the quotes can be shown in pair, e.g. 114.88/92. Such form of notation reflects the BID/ASK pair. First, the BID value is written, and then the last two numbers of ASK quote. Knowing that ASK exceeds BID, and that the difference between them is more than 100 points, you can always explicitly determine the value of second

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