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What are bid and ask?

On the foreign exchange market, like on any other market, there is supply and demand. The terms traders use for these concepts are “Bid” and “Ask”. In this article, we will look at what they mean, how they form, and how to use them when trading on Forex.

What are bid and ask?

What are bid and ask?

The terms “bid” and “ask” refer to the levels with the best potential buy and sell prices for an asset at the moment. In the trading terminal, these prices are indicated by the corresponding lines in the chart.

The bid price is the maximum price that buyers are willing to pay for the asset at the moment.

The ask price is the minimum price for which sellers are willing to sell the asset at the moment.

The difference between these two prices is called spread; the smaller the spread, the higher the liquidity of the asset.

Why are trades opened at different prices?

Each trading instrument has two prices: buy and sell. The difference between these two prices is called spread. It’s a fee for the broker's services.

The rate of two prices on Forex is akin to a currency exchange counter. If you have ever exchanged currencies, you know that the buy price is always higher than the sell price. For example, you can buy 100 dollars at an exchange counter at the rate of 80 rubles per dollar, but you can immediately sell the purchased 100 dollars to this same exchange counter only at the rate of 76 rubles per dollar. As a result, you bought dollars for 8,000 rubles and sold them for 7,600. Your loss in the amount of 400 rubles is taken by the exchange counter as a fee.

Forex works in the same way. Spread is the broker’s reward for the services provided, and the client pays for it in any case. Each new trade is opened with a loss equal to the size of the spread. From this we can conclude that the lower the spread, the more profitable it is for the trader. The size of the spread is especially important for the traders who open short-term transactions, because in a short period the price may not have enough time to work off the size of the spread and go into profit. More information about spread you can find in the article "What is Spread?"

It is important to know that buy trades are opened at the ask price and closed at the bid price. Sell ​​trades, on the contrary, are opened at the bid price and closed at the ask price.

Let's say you have opened a Buy position. The order is executed at the Ask price, which is higher than the Bid price at the distance of the spread. The spread determines the size of the broker's service fee. Such orders are closed at the Bid price. We expect the market to grow and at least reach the price at which the order was executed. In other words, the price will work off the spread and go into profit.

Sell ​​trades, on the contrary, are opened at the Bid price and closed at the Ask price. We expect that the fall in price will be at least larger than the size of the spread. After the trade becomes profitable, the trader closes it at the current Ask price.

Since the Sell order is closed at the Ask price, a trader may have questions about the execution of stop orders. For example, the Bid price did not reach the Stop Loss level, but the trade was closed anyway. This happened because the Stop Loss of Sell trades is triggered at the Ask price. You should always take into account the size of the spread and enable the display of the Ask line in the chart window (see below).

Why am I only seeing one price in the chart?

By default, the display of the Ask price is disabled in the MT4 trading terminal. So when opening a buy trade, a trader often encounters this situation:

The trade opened above the Bid price in the chart. Do not forget that buy trades are opened at the Ask price and closed at the Bid price. To display the Ask line in the chart, you need to do the following:

  • left-click on the chart,
  • select Properties from the pop-up menu,
  • go to the Common tab,
  • check the box “Show Ask line” and click OK

Now you will see that the trade was opened at the Ask price.

You can also view the current Ask price in the "New Order" window.

Let's summarize what we’ve learned:

The bid price is the maximum price that buyers are willing to pay for the asset at the moment.

The ask price is the minimum price for which sellers are willing to give up the asset at the moment.

The difference between these two prices is called spread.

Buy trades are opened at the ask price and closed at the bid price.

Sell ​​trades are opened at the bid price and closed at the ask price.

As you can see, the structure of Forex trading is quite simple. Bid and Ask prices are one of the fundamental principles of trading both on the foreign exchange market and in trading in general. After all, any merchant, in order to get profit, strives to sell their goods at a higher price and buy someone else's at a lower price.

Article last updated: 2022-05-11

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