📘 Day 1 – Article 3: Understanding Forex Currency Quotes
One of the first things you’ll notice in Forex trading is that prices are always shown as pairs, with two numbers – a bid and an ask. If you're confused by quotes like EUR/USD = 1.1200 / 1.1202, this article will break it down clearly so you understand what you're seeing, how pricing works, and how brokers earn money from your trades.
💱 1. Base and Quote Currency Explained
Every Forex pair consists of two currencies:
Base Currency: The first currency in the pair.
Quote Currency: The second currency in the pair.
🧠 Think of it like this:
You are always buying the base currency and selling the quote currency (or vice versa).
Example:
In the pair EUR/USD = 1.1200, you are being told:
“1 Euro is equal to 1.1200 U.S. Dollars.”
🔄 Trading Scenarios:
If you buy EUR/USD, you’re buying Euros and selling Dollars.
If you sell EUR/USD, you’re selling Euros and buying Dollars.
This is important because in Forex, you're not just buying an asset – you're exchanging one currency for another. That’s why it's called Foreign Exchange.
📌 A Practical Analogy:
Imagine you’re at a currency exchange booth at an airport:
You give the teller USD.
You receive Euros.
That’s similar to buying EUR/USD in Forex – you're exchanging one for the other.
📊 2. Bid and Ask Prices – What They Mean
In Forex, every currency pair is quoted with two prices:
Bid Price – the lower number
Ask Price – the higher number
🧮 Example:
EUR/USD = 1.1200 / 1.1202
Here’s what those numbers mean:
Bid (1.1200): The price at which the broker is willing to buy the base currency from you.
🟢 You sell at this price.
Ask (1.1202): The price at which the broker is willing to sell the base currency to you.
🔴 You buy at this price.
⚖️ This system is how brokers provide liquidity – they’re always ready to buy or sell.
💸 Real-Life Example:
You want to buy EUR/USD:
You pay the ask price: 1.1202
Later, you want to sell it:
You receive the bid price: 1.1200
Your cost is the difference: 2 pips
💰 3. Spread – The Broker’s Profit Zone
The spread is the difference between the bid and ask prices.
Spread = Ask Price - Bid Price
Using our example: 1.1202 - 1.1200 = 0.0002 or 2 pips
🧾 Why is the spread important?
It’s the cost of entering and exiting a trade – your trade starts in the negative by the amount of the spread.
So, you need the market to move in your favor by at least the spread before you break even.
💼 How Brokers Make Money from You
There are two main ways brokers earn:
1️⃣ Spread-Based Brokers
They add a markup to the spread.
They don’t charge a separate commission.
Very common in Market Maker models.
Example:
Raw market spread = 0.5 pips
Broker spread = 2.0 pips
Broker keeps the 1.5 pip difference as profit.
2️⃣ Commission-Based Brokers
Usually ECN (Electronic Communication Network) brokers.
Offer raw spreads (often 0.1–0.5 pips).
Charge a fixed commission per trade (e.g., $3 per side per lot).
🔍 Pros and Cons:
Tight spreads are good for scalpers or high-frequency traders.
Commission accounts offer transparency but may require larger capital.
📏 Tight vs. Wide Spreads
✅ Tight Spread
Lower cost per trade
Common in major pairs like EUR/USD
Favored for fast trades (scalping/day trading)
❌ Wide Spread
More expensive
Common in exotic pairs or during high volatility (e.g., news events)
Riskier for quick trades
🧑🏫 Conclusion: Why This Matters
Understanding how Forex currency quotes work is foundational to becoming a confident trader.
💡 Key Takeaways:
Know your base and quote currency.
Always buy at the ask, sell at the bid.
Spreads affect your bottom line – tighter is better.
Brokers either earn through spread markups or commissions – choose based on your style.
Knowing this empowers you to:
Read quotes instantly
Estimate trading costs
Pick the right broker and account type
Manage risk more effectively
🧠 When you understand what you're looking at on your screen, you stop trading blindly and start trading wisely.
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