Spreads

 It is the difference between BUY and SELL, or BID and ASK.

 In other words, this is the difference between the market maker's

"selling" price (to its clients) and the price the market maker

"buys" it from its clients. If an investor buys a currency and

immediately sells it (and thus there is no change in the rate of

exchange), the investor will lose money. The reason for this is

 “the spread”.  At any given moment, the amount that will be

received in the counter currency when selling a unit of base

currency will be lower than the amount of counter currency which

 is required to purchase a unit of base currency.  For instance,

 the EUR/USD bid/ask currency rates at your bank may be

 1.2015/1.3015, representing a spread of 1,000 pips

 (percentage in points; one pip = 0.0001).  Such a rate is much

higher than the bid/ask currency rates that online Forex investors

 commonly encounter, such as 1.2015/1.2020, with a spread of 5 pips.

 In general, smaller spreads are better for Forex investors since

 they require a smaller movement in exchange rates in order to

profit from a trade.

Prices, Quotes and Indications

The price of a currency (in terms of the counter currency), is called “Quote”.

 There are two kinds of quotes in the Forex market: Direct Quote:

 the price for 1 US dollar in terms of the other currency, e.g. –

 Japanese Yen, Canadian dollar, etc. Indirect Quote: the price of

 1 unit of a currency in terms of US dollars, e.g. – British pound,

 euro. The market maker provides the investor with a quote.

  The quote is the price the market maker will honor when the deal

 is executed.  This is unlike an “indication” by the market maker,

 which informs the trader about the market price level, but is not

 the final rate for a deal. Cross rates – any quote which is not

 against the US dollar is called “cross”. For example, GBP/JPY is

a cross rate, since it is calculated via the US dollar. Here is how

 the GBP/JPY rate is calculated:

 GBP/USD = 1.7464;

USD/JPY = 112.29;

Therefore:  GBP/JPY = 112.29 x 1.7464 = 196.10

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