Bid and ask are common terms used in Forex and financial markets in general. It refers to the price that buyers and sellers in the marketplace are willing to buy and sell at. In other words, bid and ask indicate the price at which a currency pair or another asset can be sold or bought at the current time.
The Bid Price
The bid price is the price that the trader is willing to pay for the traded asset. For example, if a trader wants to buy a currency pair, then the bid price will be the price he has to pay. The bid price represents the highest price that a trader is willing to pay for the traded asset.
The Ask Price
The ask price is the price that the trader is willing to receive from selling the traded asset. For instance, if a trader wants to sell a currency pair, then the ask price is the price he will get. The ask price represents the lowest price that a trader is willing to sell the traded asset for.
The Current Price
Understanding the current price is essential to understand the difference between the bid price and the ask price. The current price, also known as the market value, is the actual selling price of an asset on an exchange. It is the last traded price of that asset and is constantly fluctuating. The current price is determined by the market forces of supply and demand. Changes to either supply or demand make the current price rise or fall.
Bid and Ask Explained
While the current price represents the market value of an asset, the bid and ask prices represent the maximum buying and minimum selling price respectively. The bid price is usually higher than the current price, while the ask price is normally lower than the current price.
The ask price is always a little higher than the bid price, based on the fact that no investor will sell an asset for a lower price than the bidding price.
The bid price represents the demand while the ask price represents the supply of the asset. The difference between both is known as the spread.
In forex trading, bid and ask prices are both applied to a single currency pair at the same time. When you buy the EUR/USD, for example, it means that you’re buying the euro and selling the dollar. Buying a currency pair means selling the second currency (quote currency) to buy the first currency (base currency) in the pair.
When trading currencies, a quote for a EUR/USD currency pair can be $1.1250/52. The first figure represents the bid price of $1.1250, while the second figure represents the ask price, and the difference between the two is the spread worth of 2 pips.
Bid-ask spread is the difference between bid price and ask price of an asset. The difference between the two prices defines the spread. The larger the gap, the higher the spread. Spread values can be very small in a high liquidity market, but when the market is less liquid, spreads will be wider.
Both the bid and ask prices are displayed in real-time on the trading platform and are constantly updating. The variable difference between the two prices is a key indicator of the liquidity of the market and how much the transaction costs.
High liquidity in any market is usually caused by higher trading volume. High liquidity enables traders to buy and sell closer to the market value price. That’s why the bid-ask spread tightens in a more liquid market.
How to take Advantage of the Bid-Ask Spread
Regardless of the trading strategy being followed, it’s always ideal to trade at the best price possible. Be careful and try to get the best price whenever possible. However, in fast-moving markets, where you need to get into or out of a position quickly, you’ll sometimes need to choose the best available price to enter a trade.
Most forex brokers require that you pay the spread when entering and exiting a position. That’s why forex day traders seek forex brokers with low spreads. The bid-ask spread is considered as a hidden trading cost. It can work against you, but it can work for you only if you pick your entry points carefully.
The bid price is the buying price that buyers offer for an asset. Usually, traders tend to buy assets as cheaply as possible and achieve a large bid-ask spread through higher ask and lower bid prices. While an ask price is the selling price offered by sellers for an asset. They usually want to sell their assets as expensive as possible.
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