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. It’s when two sides - buyers and sellers of a certain asset try to determine the best price that will satisfy their needs. And they do so using market and limit orders
 
Traders and service providers engage in this 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 the 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 price.
 
The bid and ask prices are prices 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 offer commissions.

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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. 
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 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.
 Bid higher than ask

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. 

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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 assets as cheaply 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 price fails to reach that level, the order will not get filled. 
Bid and ask rate in Forex
The difference between the bid and ask prices is called a 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 lies 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, have commissions. Large spreads are typically found in low liquidity markets such as exotic pairs and during low liquidity trading sessions, such as Tokyo and Sydney sessions. To avoid large spreads, it's recommended to trade major pairs and during London and New York trading hours. 

 

What is an 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 a bid higher than 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 the asking price of 1.2346. 

The difference of 0.0002 is called the bid and ask price Forex spread, with an amount of 2 pips. And those 2 pips are what generate profit for service providers. In fact, the majority of brokers and other providers are based on the income from spreads because they don’t impose additional fees on traders.

So, if the bid price suddenly becomes higher than the ask price, there will be nothing for a provider to get a payout from. That’s because they sell assets more expensively – so that traders can get fewer amounts – and buy them more cheaply – so that they can get larger amounts. Therefore, the bid price is never higher than the ask price.
 

What does buy and sell mean in Forex?

Buy and sell are the position types in Forex. 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 is bid and ask price 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 bid and ask price in forex?

Orders types are categorized into limit and market orders. When traders place market orders, they tell 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 from predetermined levels. The downside of limit orders is that they may never get filled if price does not reach a certain point. Limit orders are creating ask and bid prices. Ask price is the price a trader buys a currency pair at, and Bid price is the price a trader sells a currency pair at. 
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