Buying and Selling Currency Pairs

• The exchange rate describes how much one currency can buy of another currency.
• For example, the most commonly-traded currency pair consists of the euro and the U.S. dollar. It is always listed as EUR/USD and never the reverse order.
• When buying EUR/USD, you are actually buying euros while simultaneously selling U.S. dollars; when selling EUR/USD, you are selling euros and buying U.S. dollars.

Anatomy of a Currency Pair

• The first currency listed in the currency pair is called the base currency; the second currency is referred to as the quote, or sometimes counter currency.
• When published with an exchange rate, the currency pair indicates how much of the quote currency is required to purchase one unit of the base currency. For example, EUR / USD = 1.5467 indicates that one euro can buy 1.5467 US dollars.
• When selling a currency pair, the exchange rate shows how many units of the quote currency you will receive when selling one unit of the base currency.
• By enforcing these strict standards on how to refer to currency pairs, mistakes are reduced and it is easier to keep exchange rates organized and clearly understood.

Exchange Rates and Spreads

• Each currency pair listed by your broker is accompanied by an exchange ratethat shows the bid and ask price for the currency pair.
• The bid price is the rate that your broker is willing to pay for the currency pair; in other words, this is the rate you receive if selling to the market.
• The ask price is the rate at which your broker is willing to sell and represents the rate you must pay to buy the currency pair.
• The bid price is always less than the ask price because brokers pay less than they receive for the same currency pair. This difference – known as the spread – is how your broker generates much of its revenue.
• The illustration at the top of this page shows how brokers typically display a currency pair to show the current bid and ask price.
• In this example, the bid is 1.4745 dollars to each euro, while the ask is 1.4746 dollars to each euro.
• The bid price is always shown before the ask, and because the difference between two prices tends to be very small, brokers usually only display the last two digits when showing the ask price.

The spread represents your cost to trade with the broker. Spreads can vary significantly from broker to broker so it is very much in your interest to trade with the broker offering the best (i.e. the tightest) spreads in order to minimize your trading costs.