Understanding the Bid/Ask Pricing and Spread in Trading

spread forex

To read and understand a forex quote, it helps to become familiar with the terminology. It all starts with a currency pair, which tells you the currencies involved in the trade. You'll need a firm understanding of what's going on if you're going to excel at forex trading, and that means you must understand the bid and ask prices—what they mean and how to use them. 

How to Read a Forex Pair Price Quote

In a quote, the currency pair is often followed by a bid and ask price, which will reveal the spread and the number of pips between the broker's bid and ask price. Understanding these terms in a little more depth can help you as you get ready to set up your initial trades.

The image below shows a sample forex price quote that you’d see on your trading platform. Read the pair as the Euro-U.S. Dollar or the Euro-Dollar.

forex spread

forex spread

The currency on the left, the EUR, is called the base currency. That’s because price movements of the EURUSD are “based” on the base currency. 
The currency on the right, in this case, the USD, is usually called the counter currency because the price of the pair moves “counter” to the value of the USD versus the EUR. 

There are two parts to a forex quote, a bid and an ask. Here's another forex quote that helps make clear the meaning  of these terms in the forex market:

  • EUR/USD = 1.1131/32

Here the bid is 1.3600, and the ask is 1.3605. Since the difference between a bid and an ask price in normal circumstances is a very small fraction—less than 1/100th of the currency unit—the convention is that only the last two digits (05) of the four trailing digits are shown. If you spelled this out, it would look like this:

  • EUR/USD  = 1.1131/1.3605

Here the bid price is 1.3600, and the ask is 1.3605.

Continue reading for more information or play around in a risk-free forex demo account and notice the Bid/Ask Spread in real-time.

The Bid/Ask Pricing Explained

You can see the bid and ask prices if you have access to the proper online pricing systems. The Forex market structures its pricing around the bid/ask.

You'll notice that the bid price and the ask price are never the same. The ask price is always a little higher than the bid price. You'll pay the ask price, which is the higher price if you're buying the currency pair, and you'll receive the bid price, the lower price if you are selling the currency pair. 

The above Bid - Ask price quote means you could do one of the following:

  • Buy the EURUSD pair at the (higher) ASK price.

That means: You buy Euros and pay for them to buy selling dollars, paying the higher ask price. For every 1 EUR you buy, you’re selling $1.1132 USD, regardless of whether your account is funded with JPY, GBP, EUR, and so on. Amounts are converted as needed.

  • Sell the EURUSD pair at the (lower) BID price.

That means: You sell Euros and get U.S. dollars in exchange for them at the lower sell or bid price. For every 1 EUR you sell, you’re being paid $1.1131 USD.

Understanding the Spread

What happens to the difference between the two prices? This difference is called the spread, and it's kept as profit by the forex broker or specialist who is handling the transaction. In actuality, the spread goes to pay a number of fees in addition to the broker’s commission.

Remember, you’re always buying at a higher price and selling at the lower price so that the forex broker can earn the spread in lieu of fees or commissions. When you buy or go long the EURUSD, you’re long the base currency EUR and you’re short the USD. When you sell the pair, you’re doing the opposite. Thus, you’re always long one currency and short the other, so it’s as easy to short one currency versus another and, thus, benefit from its downtrend as it is to be long that same pair. When you enter or exit a position you buy at the higher ask price, and sell at the lower bid price. Why? The difference or spread between the bid and ask prices is the profit the market maker or broker earns for pairing buyers and sellers instead of charging a commission like stock brokers.  

Getting the lowest Spread

Many forex traders, particularly those who are new to the forex market, are totally unaware that there are different order types (buy limit, sell limit, buy stop, sell stop). So they simply call up their broker and tell him that they want to buy a given currency pair, gold, oil or dow jones. And the problem with that?

Unless you name a specific price, you’re giving your broker permission to fill your order at any price.

Unlike market orders (orders to buy or sell immediately at the current price), entry orders (or entry limit orders) are pending orders entered in advance to enter or open a new position at some future price that the trader deems more favorable than the current price. These will execute automatically and don’t require any action from the trader at that time. 

Here is why limit order will help you trade with the lowest Bid/Ask Spread:

  • A limit order is visible to the market and instructs your broker to fill your buy or sell order at a specific price or better.
  • A stop order isn't visible to the market and will activate a limit order once a stop price has been met.
  • A stop order avoids the risks of no fills or partial fills, but because it is a market order, you may have your order filled at a price much worse than what you were expecting.


Forex Broker with the Lowest Spread

ECN brokers (Electronic Communication Network brokers) are among the fastest emerging brokerages in the Forex world, and there's no question that new ECN brokers are opening their doors regularly. In short, ECN Forex brokers provide a marketplace where traders and market makers can place competing bids against each other. Minimum deposits for ECN accounts are often higher than they are with standard Forex accounts, but there are several significant advantages offered by the best ECN brokers, such as the ability for scalping and lower forex spreads.

With so many attractive options to choose from, choosing between different ECN trading options can be surprisingly difficult. Compounding the decision is the fact that many traditional brokers offer ECN accounts in addition to their standard trading accounts, which widens your pool of options.

Without doubt, forex brokers with the lowest spread are the ECN brokers or brokers that provide ECN execution (account).  

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Understanding how entry orders (buy limit, sell limit, buy stop, sell stop) works is important, but if you want some help, MetaTrader 5 AM Broker offers 6 types of pending orders and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how limit orders can make you serious money.

You can test automated strategies using different types of orders by creating a Forex EA in Robo-Advisor 007 (14 Days FREE Trial).

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Categories:  Forex