Let's take a look at an example of what a Forex rate quote looks like:



EUR/USD = 1.2526

Can you tell what this means? This shows the current foreign exchange rate between the euro and the US dollar.

With any Forex quote, remember that two currencies are going to be quoted. This is because when you trade in Forex, in effect you're buying one currency and selling a second currency at the same time, or trading them.

Therefore, when you read Forex quotes, the second currency listed is going to be your quote currency, and the first currency listed is going to be your base currency. Forex quotes show us what the relationship in price is between these two currencies.

The exchange rate says how many units of the quote currency you have to pay to get one unit of the base currency.

With the above example, the quote currency is the US dollar; the base currency is the euro. This price quote illustrates how each currency is trading in relation to the other. To buy one unit of a euro, then, you'll have to sell 1.2526 units of the US dollar.

Is that clear enough? One more thing we need to add to our example is called the "bid/ask spread."

In Forex trading, no commissions are charged on any trades placed. However, brokers get paid for their work through what's called the "bid/ask spread."

So if we add our bid/ask spread to the example given above, it looks like this:

EUR/USD = 1.2526/1.2528

Or, its "shorthand" simplification looks like this:

EUR/USD = 1.2526/8

In the above example, you can see on the right that the last digit is two points higher than the last digit on the left. This is the broker's "commission." In other words, brokers make their money by buying currencies for slightly less than they sell them at. Every broker does it; it's fully legal to work this way. However, the amount of the spread can be different from broker to broker.

Therefore, as a trader, you buy at the bid price, or the first price quoted. You'll then sell at the ask price, which is the second price quoted. The difference between the prices is called the "spread;" the broker keeps this amount as their profit on the trade.

So for instance, with the above example, you buy at 1.2526 and sell at 1.2528. Two pips, or 0.0002, go to the broker to pay them for executing the trade.

Therefore, the bid/ask spread is simple and straightforward, and easily calculates fees and expenses incurred in trading.