Currency pairs, bid, ask and spread: how to read a quote

Opening a trading platform you'll see a list of symbols like EUR/USD, GBP/JPY, AUD/CAD, with two numbers next to each. It looks like a secret code but it's much simpler than it seems. In this lesson you learn to read a quote without hesitation and to understand how much each trade really costs you, something beginners always underestimate and that, in the long run, decides who stays afloat.

Why currencies trade in pairs

A currency has no absolute value: it has a value relative to another. It makes no sense to say "the euro is worth 1", but it makes sense to say "one euro is worth 1.10 dollars". That's why in forex you always trade pairs: buying one currency means simultaneously selling another.

Each pair is written with two three-letter codes separated by a slash:

• EUR/USD: euro against the US dollar
• GBP/USD: British pound against the dollar
• USD/JPY: dollar against the Japanese yen

The first currency is the base currency, the second is the quote currency (or counter currency). The quote tells you how many units of the quote currency you need to buy one unit of the base currency.

The pair families

Not all pairs are alike: they differ in volume, spread and behaviour.

For a beginner the rule is simple: start with one or two majors (EUR/USD is the most studied and has the lowest spread) and get to know them well instead of jumping from pair to pair.

Bid, ask and spread: where the cost comes from

Looking at your broker you'll see two prices for each pair, for example 1.10000 / 1.10012. They're not a mistake.

• Bid: the price at which you can sell. It's the lower of the two.
• Ask: the price at which you can buy. It's the higher.
• Spread: the difference between the two. Here 0.00012, that is 1.2 pips.

Think of a currency exchange booth at the airport: it buys your euros at one price and sells them back at a slightly higher one. The difference is its profit. The broker does the same, and the spread is the entry cost of every trade.

That's why as soon as you open a position at market you are slightly in loss: if you buy at the ask 1.10012 but could only sell at the bid 1.10000, you're 1.2 pips under. Price must move at least that far in your favour before you break even.

Why the spread changes

It isn't fixed (unless the broker offers fixed spreads). It tends to widen when liquidity is thin (night, weekly close, holidays) or uncertainty is high (high-impact economic announcements). You'll often see it double or quintuple for a few seconds. It's one of the reasons trading right around an important announcement is risky for a beginner.

The other costs you'll pay

Besides the spread, a trade can carry other costs:

• Commissions. Some accounts (called Raw or ECN) have very low spreads but charge a fixed commission per lot traded. Always compare the total cost: spread + commission.
• Swap (or rollover). If you hold a position beyond the daily close (usually 5 pm New York), you pay or earn interest linked to the rate difference between the two currencies. It can be positive or negative, and matters more for trades lasting days or weeks.
• Slippage. The difference between the price you wanted and the one you were filled at, typical of very fast moments. It can go against or in your favour, but on big news it tends to hurt.

How to read the decimals

Almost all pairs are quoted with four decimals (1.1000), except yen pairs, which use two (150.25). Many brokers add a fifth (or third) decimal, called a pipette, worth a tenth of a pip. So 1.10012 is a price with a pipette. In the next lesson we'll see what pips are and how they turn into money.

Cross rates: how crosses come about

Wondering how the price of a pair like EUR/GBP, with no dollar in it, is formed? It's derived by crossing two majors. If EUR/USD = 1.1000 and GBP/USD = 1.2500, then EUR/GBP = 1.1000 / 1.2500 = 0.8800. You don't have to calculate it by hand (the platform does), but understanding that every cross comes from two majors helps you see why, for example, when the dollar makes a strong move many crosses move in a correlated way.

Watch the rates live

This table (from TradingView) shows real exchange rates between the main currencies, updated in real time. Read it as a matrix: the currency in the row against the one in the column. Find EUR/USD, GBP/USD and USD/JPY and compare with what you've just learned about base and quote.

In short

• You always trade in pairs: the base currency is the first, the quote the second.
• The price says how many units of the quote currency you need for one unit of the base.
• Bid is the selling price, ask the buying price: the difference is the spread, the entry cost.
• Besides the spread there are commissions, swap and slippage. Always assess total cost.
• To start, concentrate on one or two majors.

Practical exercise

1. On your broker's demo account compare the spread of EUR/USD, GBP/JPY and USD/TRY at 9:00, 15:00 and 23:00 (your time). Write down the numbers.
2. Work out how much it costs in money to open 0.10 lots on each pair, using the pip value calculator.
3. Write which pair you'd pick to start with and why.