Understanding how forex transactions are priced – and then, how much you are really paying when you place a forex trade – requires understanding two concepts: dual price quotes and spreads.
Dual Price Quotes. There are always two prices in a forex trade: a price you can buy at, and a price you can sell at. For instance, you may see the Euro / US dollar currency pair quoted at 1.5005 / 1.5000. The first number is the price you can buy at; the second number is the price you can sell at. So, in the example just given, you can buy 1 Euro for 1.5005 US dollars. Alternately, if you want to sell 1 Euro, you can get 1.5000 US dollars.
Spreads. As the example above clearly illustrates, there is a small difference between the price you can buy at and the price you can sell at. The buy price is typically higher than the sell price. This means that if you buy a currency pair and look to sell it immediately, you have to do so at a loss. This difference between the buy price and the sell price is known as the spread. The bank or financial institution that sets the price profits from the spread. As a result, the spread is a big part of the real transaction cost of the trade, as it reflects how much the price must move in favor of the trader before the trader can exit at a profitable level.
For forex traders, knowing how to read forex quotes is essential; without this understanding, traders will not understand what the real transaction cost of their trade is.