EP139 Help, I don’t understand the difference between bid/ask prices and spreads.

In forex trading, understanding bid price, ask price, and spread is crucial. These terms determine how traders buy and sell currency pairs and the costs involved.

Forex Training for Beginners

1. What Are Bid and Ask Prices?

Every currency pair has two prices:

• Bid Price: The price at which traders can sell a currency pair.
• Ask Price: The price at which traders can buy a currency pair.

The ask price is always higher than the bid price because brokers make a profit from the difference (spread).

Example of Bid/Ask Prices

Consider the EUR/USD currency pair:

• If you want to buy EUR/USD, you pay the ask price (1.1002).
• If you want to sell EUR/USD, you receive the bid price (1.1000).

2. What is Spread?

The spread is the difference between the ask price and bid price. It represents the broker’s commission and varies based on market conditions, liquidity, and volatility.

Spread Calculation

Spread = Ask Price – Bid Price
For EUR/USD:
1.1002 (Ask) – 1.1000 (Bid) = 2 pips

Types of Spreads:

1. Fixed Spread – Remains constant, often used by market maker brokers.
2. Variable Spread – Changes with market conditions, common in ECN accounts.

Forex Training for Beginners

3. Graphical Representation of Bid, Ask, and Spread

Below is a simple diagram representing bid, ask, and spread:

lua

CopyEdit

 1.1000      1.1001      1.1002      1.1003

   |———–|———–|———–|

   |  Bid (Sell)          Ask (Buy)   |

   |              Spread = 2 Pips       |

4. Real-Life Trading Example

Scenario:

• You believe EUR/USD will rise and decide to buy at 1.1002 (ask price).
• Later, the price rises to 1.1050.
• The new bid price is 1.1048 (because bid is always lower).
• You sell at 1.1048, making a profit of 46 pips (1.1048 – 1.1002).

5. Key Takeaways

✅ Bid Price = Price to sell a currency.
✅ Ask Price = Price to buy a currency.
✅ Spread = Ask – Bid (broker’s fee).
✅ Lower spreads mean lower trading costs.

Understanding these concepts helps traders make better entry and exit decisions while managing trading costs effectively. 🚀

Forex Training for Beginners

Other useful resources:

Investopedia What types of stocks have large differences between bid and ask prices

https://www.investopedia.com/terms/b/bid-askspread.asp