Online Forex trading Community.
This page covers everything you need to know about the bid and ask prices in the online Forex trading market, From the definition of Forex bid & ask prices, to the use of the bid & ask spread.
A Forex Trading Bid price is the price at which the market is prepared to buy a specific currency pair in the Forex trading market. This is the price that the trader of Forex buys his base currency in. In the quote, the Forex bid price appears to the left of the currency quote. For example, If the EUR/USD pair is 1.2342/47, then the bid price is 1.2342. Meaning you can sell the EUR for 1.2342 USD.
A Forex asking price is the price at which the market is ready to sell a certain Forex Trading currency pair in the online Forex market. This is the price that the trader buys in. It appears to the right of the Forex quote. For example, in the same EUR/USD pair of 1.2342/47, the ask price us 1.2347. This means you can buy one EUR for 1.2347 USD.
The Forex bid & ask spread represents the difference between the purchase and the sale rates. This signifies the expected profit of the online Forex Trading transaction. The value of Bid/Ask Spread is set by the liquidity of a stock. If the stock is highly liquid, it means many stock units are being bought and sold, and the Forex bid/ask spread will be lower. Traders prefer foreign currency with a lower bid/ask spread, because it means their money pair only for the currency and is not wasted on the bid/ask spread difference. A lower Forex bid/ask spread allows the trader to cut down on his losses.
Quotations and spread.
The actual (bid or ask) price that is set for futures or options as well as the cash commodities at the certain moment is called a forex quote (or quotation) . The most common usage of the quote, which is an indicator of the market price, is information.
Currencies quotations appear in pairs. The base currency is the first one in the pair whether the quote currency (or counter currency) is the second currency listed in the pair. The wholesale market operates with five-figured quotations where the last figure has the name pip (or point).
" Bid price " and " ask price " are typical for any financial product, and forex quotes as well. FXCM ensures the traders of getting the actual price for their transactions by having bid and ask quoted in real time. A position establishing requires an immediate cost like any other traded instrument. The trader's cost is seen out of the spread, e. g. the pair USD/JPY having a bid price at 131.40 and an ask price at 131.45 gives a five-pip spread that can be overcome due to the upward market movement.
You should be aware of two points to make the forex quotations easy for you to read. Firstly, the base currency is the name for the first currency of the pair; secondly, the base currency has always the value 1.
The 'base' currency for forex quotes is the US dollar as far as it is the main currency of the foreign exchange market. Such dollar-based pairs are USD/JPY, USD/CHF and USD/CAD. In this case, quote is understood as the amount of the second currency in the pair equal to one unit of the USD. E. g. 120.01 quote for the pair USD/JPY shows that one U. S. dollar costs 120.01 Japanese yen.
If the currency pair quotes rises and the U. S. dollar is its base currency , it means that the dollar strengthens and the second currency loses its value. E. g. if the quote of the pair described above goes up from 120.01 to 123.01 then the U. S. dollar is supposed to become stronger and the yen - weaker because no we can buy higher amount of yen for $1 than we could earlier. You should note three major exceptions: the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). These currencies are also often the major ones in pairs. E. g. if the pair GBP/USD has a quote 1.4366 then it is considered than one British pound costs 1.4366 U. S. dollars.
Some pairs do not include USD are called cross currencies . According to this, a pair quote EUR/JPY 127.95 explains that we can buy 127.95 Japanese yen for one Euro.
There is a two-sided quote containing 'bid' and 'offer' that can be often seen at the forex trading platforms. 'Bid' gives you the information at which price the base currency is sold (in this case, you would buy the counter currency). The 'ask' (or 'offer') gives you the purchase price of the base currency (when you sell the counter currency).
Direct and indirect quotes.
Every country's Currency exchange market quotes its local currency against the USD as well as against other foreign currencies. The direct quotation sets the amount of the local currency required to purchase one unit of the foreign one as well as the amount of the local currency received when you sell one unit of the foreign one. E. g. for Japan the quote 120.44- 120.52 USD/JPY means that the dollar is bought for 120.44 yen whether it is sold for 120.52 yen per unit.
Indirect quote oppositely gives the amount of the foreign currency required in case you would like to purchase one unit of the local one as well as the amount of foreign currency you will receive if you sell one unit of the local one. This kind of quotes is used e. g. for trading the British pound sterling against the U. S. dollar and it looks like 1.3600 - 1.3610 GBP/USD. According to this quote, you must pay 1.3610 U. S. dollars if you want to purchase 1 British pound and in case you sell 1 GPB, you will get 1.3600 USD.
Bid Price, Ask Price (Spread)
Currency pairs have their "bid" (selling) and "ask" (buying) price like any other financial instrument like stocks, bonds or futures does. Spread is the difference between the bid and ask prices.
Otherwise, the rest of the funds at your account will be $4,900 in case the amount of money you risk is 1%. This will let you recover from the losses much faster and easier.
The second rule of the money management says that the profit expected from the deal is more than the money you risk. These requirements can be fulfilled by using limit and stop orders along with trailing stops.
For example, an expected profit of 25 pips should make you set the stop order 15 pips higher or lower than the price at which you entered the trade. The usage of trailing stops, as it was described earlier will make the expectancy ratio higher. If you use trailing stop, you will insure yourself from having high losses and will make your profits dominate.
A successful forex traders use these common techniques in order to make their profit stable and predictable. I do not think the more complicated information is worth giving, as the majority of readers do not know yet what forex is, so this is the basic information to give. There is additional information concerning various advanced and complicated strategies you can see on the web site.
The spread - the source figure used by the trader at the position taking.
GBP/USD 1.6545/1.6550 Sell Price/Buy Price.
If you are going to purchase the base currency (to long the pair) relying on your expectations of its increase, you should perform the purchase at the buy price which always higher than the sell price and you'll lose the spread difference if you suddenly decide to sell this currency at once. Simply speaking, the rise of the currency price that you have bought may cause you the losses.
In case you sell the base currency and decide to buy back the currency you have just sold while the rate did not move a point, then the difference you will lose will be the spread that is 5 pips in the given example.
The trading platform will inform you of the purchase or sale price at which you have bought or sold the currency pair. So if you have bought the pair, the trade platform will show you both your bought price and the current sell price which can be calculated as the by price subtracting the spread. If you want at least to break even, you should wait until the market makes at least a few pips up. The resume can be that the smaller the spread, the better as you'll have to wait a little time before the market moves enough pips for you to run a surplus.
Standard Spreads.
Our advantages are that we have a direct access to trading that causes the existence of the minimum spreads, which are at least much smaller than any other financial market has and the absence of any fee paid for the brokerage houses out of each transaction.
The standard spread depends on the currency pair traded. In case the pair is traded much, the spread fluctuations will be low. To sum up, the majors' (the currency pairs traded most heavily) spreads are generally very tight while the crosses' and exotics' (the pairs that are traded less) ones are much wider. The standard spread for the Majors makes from 4 to5 pips whereas the spread of Crosses and Exotics reaches from 5 to 20 pips.
The "tighter" spread shows closer sell and buy prices and the "wider" spread illustrates further difference.
The sell price (bid) is constantly smaller than the buy price (ask). The price for the pair in forex market is usually shown in the following way where the sell price goes the first:
GBP/USD 1.6545/1.6550 Sell Price/Buy Price.
The buy price is sometimes written with only two decimal digits left in the following way:
Here the spread is 5 pips. The buy price shows the amount of the secondary currency to be given in order to buy one item of the base one. The sell price shows the amount of the secondary price that you will get in order you sell one unit of the base one.
Bid/Ask Prices and Spread.
A currency pair is always quoted in two prices: Bid for sale and Ask for purchase of a base currency for the quote one.
The presented quotation 1.4112 | 1.4110 for the EURUSD currency pair means we may immediately:
Sell 1 EUR for 1.4110 USD (at the Bid price) Buy 1 EUR for 1.4112 USD (at the Ask price)
Both Bid and Ask prices are used on complete trading operation because opening and closing a position implies performing actions of opposite directions:
Opening a Buy position means buying while closing a Buy position means selling, Opening a Sell position means selling while closing a Sell position means buying.
Spread is the difference between Bid and Ask prices . Spreads of various currency pairs differ from each other. The size of the spread is measured in pips. For the EURUSD currency pair in our example the spread is equal to 2 pips.
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Bid and Asked.
What is 'Bid and Asked'
‘Bid and Ask’ is a two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time. The bid price represents the maximum price that a buyer is willing to pay for a security. The ask price represents the minimum price that a seller is willing to receive. A trade or transaction occurs after the buyer and seller agree on a price for the security.
The difference between the bid and ask prices, or the spread, is a key indicator of the liquidity of the asset. In general, the smaller the spread, the better the liquidity.
'Bid and Ask' is also known as 'Bid and Offer'.
BREAKING DOWN 'Bid and Asked'
The average investor contends with the bid and ask spread as an implied cost of trading. For example, if the current price quotation for security A is $10.50 / $10.55, investor X, who is looking to buy A at the current market price, would pay $10.55, while investor Y who wishes to sell A at the current market price would receive $10.50.
Who Benefits from the Bid-Ask Spread?
The bid-ask spread works to the advantage of the market maker. Continuing with the above example, a market maker who is quoting a price of $10.50 / $10.55 for security A is indicating a willingness to buy A at $10.50 (the bid price) and sell it at $10.55 (the asked price). The spread represents the market maker's profit.
Bid-ask spreads can vary widely, depending on the security and the market. Blue-chip companies that constitute the Dow Jones Industrial Average may have a bid-ask spread of only a few cents, while a small-cap stock may have a bid-ask spread of 50 cents or more.
The bid-ask spread can widen dramatically during periods of illiquidity or market turmoil, since traders will not be willing to pay a price beyond a certain threshold, and sellers may not be willing to accept prices below a certain level.
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