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Understanding Bid and Ask Prices in Forex Trading

Paulsy

Well-known member
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 indicates 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.
 
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