Bid and Ask price. Spread
There are 2 types of currency prices at Forex are Bid and Ask. The price we pay to buy the pair is called Ask. It is always slightly above the market price. The price, at which we sell the pair on Forex, is called Bid. It is always slightly below the market price.
The price we see on the chart is always a Bid price. Later on, we will find out how to check the Ask price in our trading platform. Ask price is always higher than the Bid price by a few pips. The difference between these two prices is called spread. Spread is commission we pay to our broker for every transaction. You’ve probably faced a similar logic in a bank exchanger: rates are always different for sellers and buyers.
SPREAD = ASK – BID
For example, the EUR/USD Bid/Ask currency rates are 1.1250/1.1251. You will buy the pair at the higher Ask price of 1.1251 and sell it at the lower Bid price of 1.1250. This represents a spread of 1 pip.
The more popular is the currency pair, the smaller is the spread. For example, spread for EUR/USD transaction is usually very small or, as traders say, tight. Note that the cost of spread on Forex is usually negligible in comparison with the expenses on the stock or options markets. As spread is quoted in pips, a trader can easily calculate the cost of every trade by multiplying the spread in pips by the value of 1 pip.
Other articles in this section
- Demo accounts
- Forex brokers
- MACD (Moving Average Convergence/Divergence)
- Position size, level of risk
- Margin, Leverage, Margin Call, Stop Out
- Transaction, profit, loss. Types of orders
- Economic calendar
- How can I predict where exchange rates will go?
- When is Forex market open?
- Calculating profits
- How to trade?
- What technical tools do I need for trading?
- The advantages of Forex market
- What is Forex?