If you’ve reached this post, chances are you’ve stepped into the world of forex trading and are totally confused after seeing several new terms that you’ve never even heard of previously. We’ve all been there. In all honesty, this is exactly what drives most people away from this industry. Before you decide this mode of income isn’t for you, we want you to at least give it a shot. The new terms you’ll discover are actually not as hard as you’re making them to be. Today we’re going to be looking at bid and ask in forex trading. However, in order to understand what bid and ask truly is, we need to first briefly go over what exactly is forex trading.
If you’ve ever traveled to another country, you know that the currency you use won’t work in that country. You’ll have to exchange the currency you currently have for the currency of the country you’re traveling to. By doing so, you would’ve just performed forex trading without even realizing it! Forex trading is basically the exchange of one currency for another.
And as you probably know, whenever you buy an item, you don’t buy it directly from an individual. You buy it through a store of some sort. This is exactly what a forex broker is. A forex broker is a third party that basically provides a space for traders to buy and sell currencies with each other. Without a forex broker, it’ll probably take you much longer to find someone who will buy your currency and who also has the currency you’re looking to buy.
Now that we’ve got our basics out of the way, let’s take a look at how this translates into bid and ask prices in forex trading:
BID PRICE IN FOREX TRADING
If you go to the chart of any currency pair on your trading platform, you’ll see two market prices that are currently fluctuating. And when you try to open a new position with a certain currency pair, you’ll notice that the broker is offering you a different price if you open a BUY position than if you open a SELL position. The price at which you open a SELL position with a broker is known as the bid price. The bid price also represents the demand for a certain financial asset or currency pair.
ASK PRICE IN FOREX TRADING
The ask price is basically the exact opposite of the bid price. If you’ve understood the bid price, the ask price is a piece of cake. If you try to open a new position for a certain financial asset or currency pair and you decide to open a SELL position, the price at which you would’ve opened this trade would be known as the ask price. The ask price also represents the supply of a certain financial asset or currency pair. What will really blow your mind is that the difference between the bid and ask price is what we call a spread in forex trading. This is what the broker earns with every trade that you execute.
BID AND ASK SCENARIO
In order to properly understand bid and ask in forex trading, we have to take a look at a real scenario involving a currency pair. Let’s take the EURUSD pair as an example. When trying to enter into a new trade with the EURUSD pair, you’ll be given two options of either BUY or SELL. Each of these options will come with its own market value. Let’s assume that the price at which you can enter into a BUY trade is 1.05547 and the price at which you can enter into a SELL trade is 1.05534. The BUY price is known as the bid price and the SELL price is known as the ask price. The difference between bid and ask prices is 0.00013. This price difference is known as the spread. With every trade you place with the EURUSD currency pair, your broker would be making 0.00013.
FACTORS AFFECTING BID AND ASK PRICE
It is important to know that the bid and ask price is not fixed and it can change depending on a variety of different factors. Now that we’ve understood the basics of bid and ask in forex trading, let’s take a look at some of the main factors that impact its market values:
Liquidity plays an important role in determining the bid and ask price of any given currency pair in forex trading. You should know that the more liquid the market is, the tighter will be the spreads. What this basically means is that if the market for that currency pair is super active, there won’t be much difference between the bid and ask price. This means that you’ll be getting a pretty good deal since the broker won’t be taking as big of a share as they usually do.
Another important factor that determines the bid and ask price in forex trading is the trade volume. If a certain currency pair has a higher trade volume, that means that there are currently a lot of people trading that currency pair. The higher the trading volume, the tighter the spreads. This is because the broker would be encouraging more people to invest in that currency pair. If you see a currency pair having a higher trading volume, you may get a much better deal if you enter into a trade with it at that moment.
Contrary to popular belief, your broker of choice can also impact the bid and ask price in forex trading. This is because some brokers may purposely increase the difference between the bid and ask price, or the spread, in order to gain a better profit from it. Therefore before you sign up with a broker, it is important to double-check what their spread rates are in order to know if they’re authentic or just profiting off of you.