The price difference is one of the main terms in forex trading. Before we explain it, we will explain the beginning of the mechanism of currency trading in buying or selling. The selling price and the purchase price, then we explain the spread or price difference, the size of the transaction and the contract in forex.
Forex trading mechanism
Trading in the forex market is exciting, and one of the most essential features of the currency market is that it allows the trader to trade in both directions, whether in the event of a price rise or a fall, by buying up and selling down, unlike the stock market, which is usually traded to buy shares at the lowest price, and achieve Profit by waiting for the rise and selling at the highest price.
In the case of buying: the currency pair is bought when the trader expects the rise or rise of the exchange rate of one currency against another, where the base currency is bought and the counter currency is sold, for example:
If you expect the price of the euro/dollar (EUR/USD) to rise from 1.2100 to 1.2300, you will buy to take advantage of this rise, and thus you will buy the euro and sell the US dollar (USD).
In the event of selling: the currency pair is sold when the trader expects a drop or decrease in the exchange rate of one currency against another, where the base currency is sold and the counter currency is bought, for example:
If you expect the price of the euro/dollar (EUR/USD) to fall from 1.21000 to 1.20000, you will sell to take advantage of this expected drop, and thus you will sell the euro EUR and buy the US dollar USD.
How did I sell the EUR/USD pair when I did not buy the pair in the first place? Here we say that you are borrowing euros to sell dollars against it, which is one of the most important features of the currency market.
Bid price and ask price
When trading forex, there are always two prices for each pair, the first is the bid price, and the second is the asking price.
Bid price or bid price: It is the price that a trader sees in front of him on the trading platform while he is making a sale in forex or in any stock market.
The asking price or the purchase price (Ask): The price the trader sees in front of him on the trading platform while making a purchase in forex or in any stock market.
The price difference or spread in currency trading
It is the difference between the selling and purchase prices, and the asking or buying price consistently exceeds the bid or selling price by a small amount. This amount is called the price difference or spread. Stock.
The price difference or spread is the profit margin obtained by the party executing the transaction, whether a forex brokerage firm, bank or exchange office. The wider the price difference between the buying and selling prices, the more expensive the transaction will be for the trader. Therefore, the price difference or spread is one of the essential criteria in choosing a good trading broker.
How is the spread or spread calculated in forex?
As we mentioned earlier, the spread is the difference between buying and selling prices. Usually, the price spread is determined according to the volume of orders and offers. The higher the volume of orders and offers on a particular pair or currency, the price spread, in this case, is low, due to the availability of high liquidity in the market. currencies. The trader does not need to calculate this manually, as the trading platform calculates the spread automatically.
What is the unit of measurement for the price difference?
The price difference between the buying and selling prices is measured in a unit called a point. A point is a unit of measurement used by traders in the forex market to calculate the slightest move that occurs in the currency pair’s price movement. The point represents the fourth decimal from the left of the currency exchange rate, with some exceptions in some currency pairs.
Like the pairs that contain the Japanese yen, the point is calculated for the second decimal number from the left. The word (PIP) is an abbreviation for the term (Percentage In Point), and this term means the percentage of change represented in a point.
