Explaining the bid and ask price in the foreign exchange market

One of the main components of every type of trading, including Forex, commodities, stocks, etc. is the negotiation process. This happens when two sides - buyers and sellers of a certain asset, try to determine the best price that will satisfy their demands. And they do so using the market and limit orders.
 
Traders and service providers engage in the process of negotiation by quoting (offering) the bid and ask prices. A bid is essentially the maximum price that the buyer is willing to pay for an asset; Ask is the minimum price at which the seller is willing to sell the asset that they own. Brokers aggregate liquidity from liquidity providers and offer the best possible prices to their clients.
 
The process of exchanging bid and ask prices on certain assets finally concludes in a price that is acceptable for buyers, as well as sellers. Usually, buyers want as low a price on the asset as possible, while sellers want to get the highest possible price.
 
The bid and ask prices are the points at which assets are offered for sale or for a purchase. The difference between the two is called a spread. Some brokers offer spread markups as trading fees, while others charge commissions.

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Ask and bid prices in forex

Understanding the ask and bid prices and how they work in forex is essential for success. There are two types of orders: limit and market orders. Market orders that are placed by traders instruct brokers to purchase or sell assets at the current moment, at the current price. And limit orders enable traders to buy or sell at predetermined levels. The obvious downside of placing limit orders is that they may never get filled if price doesn't reach that level. What's interesting about these order types is that they are creating the bid and ask prices. Brokers get liquidity from various liquidity providers, and they offer the best possible prices to their clients. The difference between FX bid and ask prices is called the spread, and we'll expand on this later in this guide.

And to determine those prices, the two sides – buyers and sellers – engage in the negotiation process. That is where we encounter two of the most important elements of every trade – the bid price and ask price in forex. Here’s how they work:

  • The bid price is picked as the best price by your broker out of a range of limit orders. It represents the price that you as a trader will pay to acquire the asset. 
  • The ask price is the best price out of a range of limit orders that you will be able to sell the asset that you hold. Forex ask and bid price
Now, this might seem a bit difficult to understand. So, here is an example that shows the bid and ask rates in Forex in simpler terms:

The ask and bid quote example

Let’s assume there is a trader named Josh who wants to buy a USD/JPY currency pair for 100,000 Japanese yen. After he has bought the pair, he’ll wait some time until the bid-ask exchange rate increases to sell the pair and receive a payout. To do that, Josh finds a service provider – a broker, who has acceptable trading conditions for Josh. 

Now, one would assume that the price for buying and selling the USD/JPY pair should be the same. So, if Josh buys about 911 dollars at the asking price of 109.69, he should be able to sell that same amount of yen and get 100,000 yen back, right?

However, that’s not how this system works, even though it might seem logical to many people. Instead of the bid and ask prices being the same, they are different from each other.

Therefore, if Josh buys 911 dollars with an asking price of 109.69, that will most probably be the maximum amount he will get as a result of the given trade with 100,000 yen. However, if Josh decides to sell the dollars and buy yen again, he’ll probably get a lower amount back.

For the sake of this example, let’s assume that the bidding price is 109.67. This means that the buyer will pay Josh 99,909 Yen back – assuming that the overall exchange rate remained the same at that time. From this bid and ask rate example in forex, we can see how spreads can influence profitability. A small spread might not seem significant, but if you're placing trades frequently, spreads can add up. It's important to trade liquid pairs such as major pairs and during the most active trading hours, such as during the London and New York sessions.

What does buying/selling a currency pair mean?

This bid and ask price foreign exchange example of Josh and his trading experience on the forex market demonstrates how the bid and ask prices work. Now, there is one more thing to clarify: when we are talking about the Forex bid-ask price, and also mention a certain currency pair like the above-mentioned USD/JPY, it means that we’re buying US dollars with Japanese yen. In general, buying a currency pair means just that: traders use the second currency – the base currency – to buy the first currency in the pair.
 Bid higher than ask
We can now discuss the price point which is acceptable for both sellers and buyers of these assets. As mentioned earlier, the bid price is the maximum amount the buyer is willing to pay for an instrument. Due to the fact that it is in the broker’s best interest to buy at the lowest possible price, they make sure to lower the price by negotiating with the seller
 
On the other hand, the asking price is the minimum amount the seller is willing to receive from the buyer for an asset. And when the asking price goes lower than a certain point, it’s just not worth selling at all. Therefore, the asking price is basically what the offer price means: a certain price offered to the seller of a pair

Forex ask and bid price difference – who benefits from it?

The difference between the bid and ask is called spread. Spreads are the highest when there is low liquidity on the market. Low liquidity means that there are low amounts of traders and not enough trading orders to enable orders to fill smoothly. Spreads in the markets are naturally occurring. Some brokers use spreads for charging their clients. They add spread markups to market spreads, which increases trading fees. This is how brokers generate revenue. You will come across two major trading fees: spread markups and commissions. Some offer spread-free accounts and charge traders commissions per traded lot instead. Some brokers use a hybrid system and use both fees at the same time.

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The bid and ask prices make up the trading process

To put it simply, brokers aggregate various prices from liquidity providers and offer the best possible prices to their clients.

That’s where the bid and ask price foreign exchange kicks in. A bid is a buying price that the buyer offers for an asset. Usually, they want to buy these assets at as affordable price as possible and achieve a large bid ask spread through higher ask and lower bid prices.

The ask is a selling price offered by a seller for an asset. Both bid and ask prices are created using limit orders. Limit orders are order types that enable traders to buy or sell assets from a predetermined level. However, if the price fails to reach that level, the order will not be filled.
Bid and ask rate in Forex
The difference between the bid and ask prices is called the spread. Spreads are what generate payouts for service providers, and since the majority of them don’t have commissions, that’s what their financial stability relies upon.

FAQ on the bid and ask prices in Forex

Who benefits from a large bid ask price in Forex?

Spreads reflect the difference between the bidding and asking prices of assets. Spreads are a naturally occurring phenomenon and when brokers offer spread-free accounts, nobody benefits from high spreads. However, some brokers have spread markups, which means that in addition to market spreads, traders pay trading fees to their broker. Some brokers that do not have spread markups, charge commissions. Large spreads are typically found in low liquidity markets such as exotic pairs and during low liquidity trading sessions, such as the Tokyo and Sydney sessions. To avoid large spreads, it's recommended to trade major pairs during London and New York trading hours.

What is the ask price?

In trading, there are two elements that constitute the whole price negotiation process: the bid and ask in Forex.

An ask is the minimum price that the seller is willing to take for their asset. For example, if a seller has an EUR/USD currency pair, they might set a price limit of 1.2346: if the price increases, it will mean that they will get less money for their asset which won’t be beneficial to them.

Is the bid higher than the ask price?

In trading, there is a difference between the bid and ask prices for a reason. Usually, the bidding prices are lower and the asking prices are higher. For instance, the EUR/USD currency pair might have a bidding price of 1.2344 and an asking price of 1.2346.
The difference of 0.0002 between the bid and ask price is called the Forex spread, which in this case is equal to 2 pips. And those 2 pips are the profits generated by  service providers. In fact, the majority of brokers and other providers generate  income from spreads because they don’t impose additional fees on traders.
The ask price being higher than the bid price is in the direct interest of the market maker, as it allows them to charge traders and generate more revenue. Therefore, the bid price cannot be higher than the ask price.

What does buy and sell mean in Forex?

Buy and sell are the position types in Forex. The buy is a position where you purchase a certain instrument for an ask price, whereas sell is a position where you sell an instrument for a bid price. And what are  bid and ask prices in Forex? The bid price is the amount of money your broker is willing to give you for buying an asset from you, while the ask price is the amount of money you're required to pay to your broker for an asset. Generally, the ask rate in foreign exchange is higher than the bid rate, simply because a broker needs to run on some sort of commission, which is called a Forex bid ask spread.

What is the bid and ask price in forex?

Order types are categorized into limit and market orders. When traders place market orders, they instruct their brokers to execute trades at current prices in the current moment. When it comes to limit orders, limit orders enable traders to buy or sell assets at predetermined price levels. The downside of limit orders is that they may never get filled if the price does not reach the limit point. Limit orders create ask and bid prices. Ask price is the price a trader buys a currency pair at, and the bid price is the price a trader sells a currency pair at.
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