BID
& OFFER RATES (BID/ASK)
The FOREX market quotes dealable real-time bids and offers for each currency pair. For example, say that USD/JPY is currently quoted as 106.05/106.08. The first quote is the bid (the price at which someone is currently willing to buy dollars against the yen) and the second quote is the ask (the price at which someone is willing to sell dollars against the yen). A trader who wants to buy dollars against the yen at the market must deal at the offer of 106.08. This is referred to as "lifting" or "paying" the offer. The trader will do this if he believes that USD/JPY will increase, say, to 106.75 (i.e. the dollar will strengthen against the yen). All orders to buy, whether a market, stop or limit order deal on the offer. If a trader wants to sell dollars against the yen at the market, then he must deal at the bid of 106.05. This is referred to as "hitting" the bid. The trader will do this if he believes that USD/JPY will decline, say, to 105.45 (i.e. the dollar will weaken against the yen). All orders to sell, whether a market, stop or limit order deal on the bid. The difference between the bid and offer is referred to as the "spread" and represents a cost of transacting in the FOREX market. The more liquid is a particular currency pair, the smaller will be the spread and hence, the cost. All other financial markets - bonds, equities, and futures - also have a spread, so this is not something particular to the FOREX market. FOREX bids and offers are "dealable" meaning that a trader can almost always transact at the quotes shown. (During very volatile times, there may be some discrepancy.) This price transparency is a great advantage of the FOREX market as the trader knows with almost certainty the price at which a trade can be done. The minimum fluctuation of an exchange rate is referred to as a "pip". For USD/JPY and EUR/JPY, a pip is equal to 0.01 and for the other exchange rates, a pip is equal to 0.0001.
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