Ask and bid price in forex
Understanding the ask and bid in forex is essential for success. There are two types of orders: limit and market orders. Market orders that are placed by traders tell brokers to purchase or sell assets at the current moment, at the current price. And limit orders enable traders to buy or sell from 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 ask prices is called a spread, and we'll expand 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:
- A bid price is picked as the best price by your broker out of various limit orders. It represents the price that you as a trader will pay for acquiring the asset.
- An ask price is the best price out of various limit orders that you will be able to sell the asset that you hold.
Now, this might seem a bit difficult to understand. So, here is an example that shows the bid and ask rate 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, say, 100,000 Japanese yen. And 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 satisfying 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?
No, that’s not how this system works, even though it might seem logical to many people. Instead of the same bid ask Forex price offerings, the two prices 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 fewer of it 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 in forex example, 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 London and New York.
What does buying/selling a currency pair mean?
This real-life
bid and ask price foreign exchange example of Josh and his trading experience on the foreign exchange 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 – a base currency – to buy the first currency in the pair.
Now, let’s talk about the price point which is satisfying for sellers and buyers of these assets. As we mentioned earlier, the bid price is the maximum that a buyer is willing to pay for an asset. This means that there is a certain point beyond which the price becomes too large for a buyer (usually a broker) to pay. And since every broker wants to buy assets as cheaply as possible, they try to lower the price by negotiating with the seller.
On the other hand, the asking price, as you already know, is the minimum that a 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 we are trading in low liquidity. Low liquidity means that there are low amounts of traders and not enough trading orders to enable orders to get filled smoothly. Spreads in the markets are naturally occurring. Some brokers use
spread for charging their clients. They add spread markups to market spreads, which increases the trading fees. Brokers need income to continue providing financial services to their clients. You will come across two major trading fees: spread markups and commissions. Some offer spread free account and charge traders with commission per traded lot instead or vice versa. Some brokers use a hybrid system and use both at the same time.