In our last lesson we looked at what an increase or decrease in the quote for a particular currency pair means to us as traders of the forex market. In today's lesson we are going to continue our discussion on the logistics of forex trading with a look at what the bid and ask for each currency pair means. In most financial markets there are always two prices for a particular financial instrument at any one time which are known as the bid and the ask price. The bid price is the price at which the market maker (the actual entity that is on the other side of your trade) will buy and therefore the rate at which you the client can sell. The ask price is the price at which a market maker will sell and therefore the rate at which you the client can buy.
The difference between the rate at which you can sell (the bid) and the rate at which you can buy (the ask) is referred to as "the spread". Market makers such as the people that sit on the floor of the New York Stock Exchange in the stock market make their money from the spread, or buy charging traders more when they sell a stock than they do when they buy a stock.
Although this is changing with the advent of online trading platforms, the concept of a bid and ask price is foreign to most, because traders are most familiar with the stock market where they have traditionally called their brokers whenever they wanted to place a trade who then placed the trade on their behalf with the market maker. When they call their broker they say they would like to buy x amount of xyz stock, the stock broker simply gives the client the ask price for that stock since the client has asked to buy.
As you can see here however on this online stock trading platform, when requesting a quote for Jet Blue stock the quote window returns two prices, showing both the bid and the ask.
The stock market is in the process of going from indirect access where clients trade through a broker to get to the market maker to a more direct access environment where online trading platforms allow them to trade directly with the market maker. As the forex market for individual traders really started with the internet, the market did not have to go through the same transition. Because of this most forex trading platforms show both the bid and the ask price and make their money through the spread, charging clients zero commissions to trade.
Now that we understand this lets login to our real-time demo trading platforms and look at some examples. If you have not registered for a free demo trading account yet I encourage you to pause this video now and click the free demo registration link above this video if you are watching on InformedTrades.com or in the description section of this video if you are watching on Youtube so you can follow along as well.
Once logged into the platform you will see the quotes window where you can see that the current bid price for the EUR/USD currency pair is 1.5760 and the current ask price is 1.5763. This means that currently you can sell the EUR/USD at 1.5760 and buy at 1.5763. The difference between those prices is the spread.
Moving to the right across the currency window we see that the USD/JPY currency pair is currently trading at 101.89 by 92 which is another way of saying that the bid for the USD/JPY is and the ask is 101.89 and the ask is 101.92 . This means that we can currently sell USD/JPY at 101.89 and buy at 101.92.
As some of you may have noticed, there is a fifth digit there that I have not included in my examples. Don't be confused about this at this point as we are going to learn about in a future lesson.
Now that we have a solid understanding of currency pairs, the currency quote, and the bid and ask prices the next thing that we are going to do is look at actually placing some currency trades. With this in mind the homework assignment for tonight is to place a trade on your demo trading account which would reflect the opinion that you think that the EUR is going to Strengthen against the US Dollar.
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20 Feb Mon
00:00 US- Holiday 21 Feb Tue
All Day flash PMIs 22 Feb Wed
09:00 DE- IFO Survey
09:30 GB- GDP
10:00 EZ- Final HICP
13:30 CA- Retail Sales
15:00 US- Existing Homes Sales
19:00 US- Fed Policy Minutes
20:30 US- API Crude 23 Feb Thu
13:30 US- Weekly Jobless
14:45 US- flash Service PMI 24 Feb Fri
13:30 CA- CPI
15:00 US- New Homes Sales
15:00 US- final Univ of Mich Survey
Odds are Monday will ba a subdued trading session with no major data slated and U.S. markets closed for the President' Day holiday. Key data are due over the week with the first round of PMI releases (flash) along with the German IFO Survey. These tend to be important items for analyst but not as much so for the markets in terms of price fluctuations.
As for where the forex markets are headed, my focus is on market sentiment vis-a-vis economic growth in the U.S. The Fed appears to be embarking on a policy "normalization" path starting with a rate hike on March 15. Market odds on a hike are only 38%. Traders simply don't believe the Fed has the courage to go through with a rate hike. For Yellen to have any future credibility she should hike rates. I'm not sure what this Fed is made of. A 25bp rate hike will not decimate the economy. We will see.
I feel that equity markets are currently of two minds about U.S. economic growth. They are hopeful that the new U.S. administration will be able to come through with its promises, primarily a significant tax cut. However, the establishment opposition (in both parties) are doing all they can to sabotage and obstruct major reform. They have a lot to lose. In addition to tax reform, Obamacare is a quagmire. It is a financial disaster that is going to be nearly impossible to fix in the short run. Whether it all can be fixed will depend on how well Trump delegates power and on how strong his Cabinet will be.
So the equity markets are of two minds. One is optimistic about growth and the second is pessimistic that major change will sabotaged by the establishment. The USD will be suported by positive prospects for growth and undermined by fears of no change.
As of late Friday Fed Funds futures odds for a March Fed rate hike were 38% (44%). Markets now place the odds for rate hikes by June at 112% (12%). That is 100% for one hike (March?) plus 12% for a second move.
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