It is known, that every transaction is executed at a rather well defined and concrete price, while the table Quote Spread Sheet lists three prices for each currency, for example:
Each of the participants of FOREX market enters each trade as either a SELLER or a BUYER of a particular currency. In so doing, the seller offers the currency at a higher price, for example GBPUSD at 1.6325, while the buyer bids for it at a lower price, for example, GBPUSD at 1.6322. The seller's price is called ASK and the buyers price is called BID accordingly. This is why, if you anticipate GBPUSD to appreciate (your GBPUSD chart to go up), then you should decide to buy the pound when it is low to sell it high later. You can BUY only from a seller offering it at the price equal to ASK. Should you be selling the pound (this operation is called SELL), the buyer will bid at a price equal to BID for it (this holds true for all currencies). The obvious conclusion is that if you have OPENED a position (the operation is called OPEN), that is you have executed BUY GBPUSD, and want to CLOSE it immediately (the operation is called CLOSE), that is to sell the pounds you have just bought, then you could do it only at a loss, similar to what would happen at any currency exchange booth. Consequently, to make a profit you should let the rate move in the anticipated direction more than the difference between BID and ASK. The third number is called LAST, which is an average of last BID and ASK on Forex.
As described in the section 3 above, currencies with a direct quote only appreciate when the chart goes up. Currencies with inverse quote depreciate when the chart goes up. Considering an upward movement on the chart, BUY operation would be confusing if it's profitable for some currencies but not for the others. To clear the confusion, the BUY operation for currencies with inverse quote, like USDJPY, was altered. BUY for USDJPY and the like buy not the currency itself, like JPY but it buys the US dollars instead, selling the other currency. For example, BUY USDCHF at 1.4500 buys 100,000 US dollars for 145,000 swiss franks. Thus, the BUY operation is always profitable when the chart goes up, SELL is always profitable when the chart goes down.
OPEN BUY (up) is executed at the ASK, CLOSE - at the bid BID; OPEN SELL (down) – at the BID, CLOSE - at the ASK.
How to read quotes.
The rates are usually expressed as five-digit numbers. For example, USDJPY = 121.44 means that 1 US dollar is valued at 121.44 Japanese yens (i.e. they are willing to pay you that many yens for one US dollar while you are buying or selling). At the same time, GBPUSD = 1.6262 means that 1 British pound is valued at 1.6262 US dollars. Generally, if the rate XXXYYY = Z, it means that one unit of XXX is worth Z units of YYY.
When the rate has changed, for example USDJPY = 121.44 to USDJPY = 121.45 or GBPUSD = 1.6262 to 1.6263, they say that the rate has moved 1 point. As it follows from the information above, yen in this example has DEPRECIATED by 1 point, but the pound has APPRECIATED, also by 1 point.
While watching the charts, you should keep in mind that only euro (EURUSD), British pound (GBPUSD) and Australian dollar (AUDUSD) charts reflect real movements of the rates of these currencies (that is, chart going up, means increasing price), as growth (that is, charts moving up) mean decreasing rates (prices) for the other currencies.
Sometimes quotes are given as a pair, for example 121.44/49. It is a BID/ASK pair: the first number is BID, then the two last figures of ASK. Knowing that ASK is always higher than BID and that the spread is under 100 points, the full ASK real prices can always be defined. In this example ASK = 121.49.
Some codes, numbers and definitions.
Each currency is assigned a three-letter code. For example, US dollar is coded - USD (United States Dollar), euro is coded EUR (EURo), Swiss frank is coded CHF (Confederation Helvetica Franc), Japanese yen is coded JPY (JaPanese Yen), British pound is coded GBP (Great British Pound). The currency codes are defined by ISO-4217 standard. Usually they are formed as a two-letter ISO-3166 country code and the first letter of currency name. There are a few exceptions most notable being the euro (EUR).
Currency rates are equal to ratios of currency units of different countries relative to each other. The rates are represented by 6-letter words composed of two three-letter currency codes. The first position is occupied, as a rule, by the code of a more expensive currency. The rates are expressed in units of the second currency per unit of the first one. For example, rates USDCHF (USD-CHF) show the number of Swiss franks in one US dollar, but rates GBPUSD (GBP-USD) show the number of US dollars having to be paid for one British pound. More detailed information on the codes of financial instruments may be found in this table.
Purpose of trading
The purpose of trading on any market is to buy low and sell high. The foreign currency market FOREX is no exception. The goods traded on this market are rates of currencies of different countries. As any other goods the currencies have their prices.
To settle transactions between businesses located in different countries, governments, speculative transactions and so forth, banks around the world execute currency trades on FOREX market. Depending on various trade, economical and other parameters, interest rates, central bank policies, time of the day, preferences and anticipations of the market players, and many other causes, the rates, that is prices, of currencies stay in ceaseless motion.
