Bid And Ask Price In The Forex Market
When trading the Forex market, the ask price is the price you will pay when buying a currency pair and the bid price is the price you will pay when selling a pair. The ask price is always the highest of the two quotes.
Here is an example of a price table showing the bid and ask.
The difference between the bid and ask is called spread. This is a transactional cost paid by traders to their broker. Calculating spread is rather easy, just use the following formula.
Spread = Ask price – Bid price
If you are about to place a buy trade on EURUSD with an Ask price of 1.10005 and the Bid price is 1.10000
Spread = 1.10005 – 1.10000 = 5 pip spread
The impact of this price difference on your results depends on what type of trader you are. A scalper looking to make a 20 pip profit cannot afford to pay a 10 pip spread because the risk to reward will be too low. On the other hand, a position trader going after 500 pips won’t have to stress too much.
Us traders do not have much control over the spread. A few things that can be done are – Carefully choosing when to trade, use various order types to decrease the impact of spread, and make sure to trade with a broker such as Plus500 that offer competitive spreads.
Which price is shown on my chart?
The price that you see quoted on your chart is usually the bid price.
If you open a buy position you will see the entry level slightly above the bid price (as long as the spread is low, if there is a significant visual price gap then the spread is wide).
What happens when you close trades?
Bid and ask prices apply when closing trades as well. This means if you are in a buy trade and want to close it, this will be executed at the bid price and if you want to exit a sell position, it will be closed at the ask price.
Taking our EURUSD example from earlier – The market moves to 1.11000 (bid price), you notice a level of resistance and decide to close your position. The trade WILL NOT be closed at the ask price (even though it is the price you entered at) instead the trade is closed at the quoted bid price.
I am sorry to be the bearer of bad news but, unfortunately, your trade will not always be executed at the price you intended to enter.
This can occur for a few reasons:
- Not enough volume being traded at the current moment thus the spread between the two prices cannot be maintained.
- A sudden spike in volatility.
- Broker errors.
- The Forex market is the most liquid in the world therefore, at reasonable volumes, it is easy to enter and exit trades.
- Tape readers pay close attention to the bid and ask price and use them to gauge supply/ demand in the market.
Hopefully, you have a better understanding of the bid price, ask price as well as spread. If you found this article helpful, then please do share it with your fellow traders.
Risk disclosure – Trading CFD’s carries risk, losses can exceed deposits.
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