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Exchange rate

Category — General Notions

The exchange rate of a pair consists of two prices — the sale price (demand price), which is called Bid and the purchase price (offer price), which is called Ask.

At the Bid price, traders sell a currency pair (Sell transaction), i.e., you can sell the base currency and get the quote currency. At the Ask price, traders, on the contrary, buy a currency pair (Buy transaction), i.e. you buy the base currency by selling the quote currency.

Consider the example of the EUR/USD currency pair. The exchange rate of this pair is 1.0732/1.0735. That is, the sale price (Bid) is 1.0732, and the purchase price (Ask) is 1.0735. Suppose you need to buy 1,000 EUR (base currency), in this case you will pay 1,073.5 USD. If you had to sell 1,000 EUR, then in this case you would receive 1,073.2 USD.

The sell price is always higher than the purchase price, so the Bid price will always be less than the Ask price. This difference is called the currency pair spread. In our case, the spread is 3 points. The size of the spread depends on the liquidity of the currency pair. A wide spread can be observed in the most liquid currency pairs. What factors can affect the size of the spread change? First of all, it is the popularity of the pair. Transactions on popular pairs occur more often and in larger volumes, so the difference between the purchase and sale prices is lower than that of exotic currencies, and the spread, accordingly, is narrower. Spreads may widen with major news releases. Another important factor is the trading time. Due to the change of trading sessions, the liquidity of currency pairs changes and the spread widens or narrows accordingly.
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