Bid and Ask Price Explained
Like other financial markets, forex has a bid and ask price. These prices update in real-time and reveals the current situation of the market.
If you are scratching your head what the hell we are talking about, then don’t be.
In this guide, we are going to explain forex bid and ask prices and why they are important.
First, let’s define them separately.
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1. Ask price
The ask price is the minimum price at which you can sell a forex pair at that time. It frequently changes, as do all other prices on an exchange, as traders respond and make moves. As a result, the ask price is a predictor of a pair’s value at any given time.
2. Bid price
The bid price is the maximum price that you are willing to pay to go long for a currency pair at that moment. Prices can change quickly as you and other traders act across the globe. These actions are called current bids.
To understand the concept of bid/ask, let’s assume you visit a phone dealer.
You like the one phone and inquire about the price. The dealer asks for $1000.
This means that the phone dealer is willing to sell you the phone at a $1000 asking price.
On the other hand, let’s say you want to trade your current phone. The dealer bids $500. This $500 is the bidding price dealer is willing to buy your phone.
Your forex broker is like a phone dealer that lets you have a bid and ask prices.
Now that you are aware of the bid/ask concept, let’s explain this with a forex example.
On the chart below, you can see the GBP/USD pair.
The red block you see is the bid price. This is the price at which your forex broker is willing to buy GBP/USD from you.
The blue block you see is the ask price. This price illustrates your broker’s willingness to sell you GBP/USD.
There is one more thing for you to understand. When we talk about the forex bid/ask price and mention a certain currency pair like the GBP mentioned above/USD, we’re buying British pounds and US dollars.
In general, buying a currency pair means just that: you use the second currency – a base currency to buy the first currency in the pair.
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The bid/ask spread
There is a term, which you need to remember when understanding bid and ask prices. This term is a spread.
The bid/ask spread, or the bid and ask spread, is the difference between the bid price and the ask price of a forex pair. For example, the difference in price between someone buying a currency pair and someone selling a pair represents the bid-ask spread.
As the forex uses pip for the measurement, the bid/ask spread has a pip value.
The spread act as a transaction cost. When you buy a pair, you’ll pay a slightly higher price than the broker’s quoted price.
Similarly, when you sell a pair, you’ll get a somewhat lower price than the broker’s quoted price.
This is how your broker makes money. They profit by selling the currency to you for a higher price than they purchased for it.
They also profit by purchasing the pair from you at a lower price than they will receive when selling it.
There is a reason why there is a gap between bid and ask prices in trading. Bidding prices are typically lower, and asking prices are higher. For example, the GBP/USD currency pair could have a bid price of 1.4050, and an ask price of 1.4052. The difference of 0.0002 is referred to as the bid and ask price forex spread of two pips. And it is these two pips that produce profits for your broker.
To summarise, traders and brokers are always negotiating in order to set beneficial rates. The price must be as high as possible for one side and as low as possible for the other.
Bid/ask prices and forex trading sessions
We are all aware that the forex market is a global market with many trading sessions. They are; Sydney, Tokyo, London, and New York.
The bid-ask spread for a currency pair might change based on the trading session. For example, the bid-ask spread will often be the smallest during the London and New York sessions, as these have the highest trading activity.
However, a three-hour window occurs immediately after the New York session closes and before the Tokyo session opens, during which the spreads can be significant. This is especially true for some currency crosses and exotic currency pairs, but it can affect major currency pairs as well.
Although the Sydney session begins immediately after New York ends, it is not nearly as liquid as the New York session and produces far wider spreads. Volume does not pick up until three hours later when Tokyo comes online, and most spreads return to normal.
If you intend to trade within these three hours, keep this in mind.
Regardless of the trading session, you should always verify the bid/ask spread before placing a trade.
- The bid is the amount of money that buyers are willing to pay for a currency pair.
- The ask is the price at which the seller is willing to sell it.
- The spread is the difference in price between the bid and ask. In the FX market, this spread is represented as pips.
- When you’re buying, you’ll pay what the broker’s asking for the currency; when you’re selling, you’ll need to accept what the broker’s bidding.
- Forex brokers make money from spreads.
When entering and exiting a position, most forex brokers, but not all, demand you to pay the spread. As a result, forex day traders or scalpers look for forex brokers with low spreads.
Consider the Bid/Ask Spread to be a hidden trading cost. It can work against you if you have to pay it all the time, but it can work for you if you choose your entry points correctly.
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Heinrich is a Forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best Forex Brokers in South Africa. Join him on his Journey!
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