Bid and Ask Price: The Foundation of Forex Quotes

Every time you trade in the forex market, you are presented with two prices: the Bid and the Ask. Understanding these prices—and the gap between them, known as the Spread—is the first step to calculating your costs and managing your trades effectively.

What is the Bid Price?

The Bid Price is the price at which the market (or your broker) is willing to buy the base currency from you.

• For You (The Trader): This is the price you sell at.
• Example: In EUR/USD quote of 1.0850 / 1.0852, the Bid price is 1.0850.
• If you open a Short position (sell), you enter at 1.0850.
• If you close a Long position (sell to close), you exit at 1.0850.

What is the Ask Price?

The Ask Price (sometimes called the "Offer") is the price at which the market (or your broker) is willing to sell the base currency to you.

• For You (The Trader): This is the price you buy at.
• Example: In EUR/USD quote of 1.0850 / 1.0852, the Ask price is 1.0852.
• If you open a Long position (buy), you enter at 1.0852.
• If you close a Short position (buy to close), you exit at 1.0852.

The Spread: Your Cost of Trading

The difference between the Bid and the Ask price is called the Spread. This is how "no commission" brokers typically make their money.

$$ \text{Spread} = \text{Ask Price} - \text{Bid Price} $$

Using our previous example (EUR/USD 1.0850 / 1.0852):

• 1.0852 - 1.0850 = 0.0002 or 2 Pips.

When you enter a trade, you immediately start slightly negative because you have to cross the spread.

• If you Buy at 1.0852, the market price (Bid) is 1.0850. You are instantly down 2 pips.
• The price must move 2 pips in your favor just for you to break even.

Types of Spreads

1. Fixed Spreads

The spread remains the same regardless of market conditions.

• Pros: Predictable costs; good for news trading where volatility spikes.
• Cons: Often wider (more expensive) than variable spreads during normal times.

2. Variable (Floating) Spreads

The spread changes based on supply, demand, and liquidity.

• Pros: Can be extremely tight (low cost) during major sessions like London and New York overlaps (e.g., 0.1 - 0.5 pips).
• Cons: Can widen significantly during major news announcements (NFP, CPI) or low liquidity periods (market open/close), potentially triggering stop losses.

Real-World Example

Imagine you want to trade GBP/USD.

• Quote: 1.2500 / 1.2503
• Bid: 1.2500
• Ask: 1.2503
• Spread: 3 Pips

Scenario A: Going Long (Buying)

1. You buy at the Ask (1.2503).
2. Price rises to 1.2510 / 1.2513.
3. To close the trade, you must sell at the new Bid (1.2510).
4. Profit = 1.2510 - 1.2503 = 7 Pips.

Scenario B: Going Short (Selling)

1. You sell at the Bid (1.2500).
2. Price falls to 1.2490 / 1.2493.
3. To close the trade, you must buy back at the new Ask (1.2493).
4. Profit = 1.2500 - 1.2493 = 7 Pips.

Summary

Always keep an eye on the spread, especially if you are a scalper or day trader. High spreads can eat into your profits significantly over hundreds of trades.