Forex Basics

What is Bid, Ask and Spread

This is a topic that is very confusing for 99% of all traders. The spread itself is very straight forward, but when you get ask about the Bid and Ask of it, you will get a blank stare. Depending on whom you talk to, the definition of Bid and Ask change, so I will explain how each work and you can make the call yourself. You will understand what I am talking about in a few minutes.
The first thing you will hear is the broker you are using will make their money from the spread. What this is is a few pips they take off the top when you enter a trade. If the spread for the EURUSD is 2 pips, you will enter your trade and be instantly down by 2 pips in your trade as the broker has taken them from you right off the top. If the position size you took equates to 10 cents a pip, your broker will take 20 cents as their fees (2 pips) and in doing so you will be -2 pips as you have opened the trade.
There are 2 sets of prices on each chart but you only see one.
There is a price for when you are selling and there is a price for when you are buying.
The difference between the selling price and the buying price is the spread.
To keep from getting confused, your charts will display only one of these prices, the other price will be invisible but it’s important to know it’s there.
The Spread it there for your broker, that’s how they make money for their efforts. It doesn’t matter to them if you win or lose your trade, only that they get paid for brokering the trade.
When you think about economics in the world, you would buy something for a low price and sell it for a higher price, the spread works this way as well. For example, you can buy at 1.5000 or you can sell at 1.5002.
The Bid is the price you can BUY at (1.5000)
The ASK is the price you can SELL at (1.5002)
The BID price is always lower than the ASK price.
Your charts will, 99% of the time, show you the BID price
When you enter at market, this spread thing won’t make much difference, you will be entered into the market and your spread will be taken off the top, done deal.
When you are going to enter at a predetermined buy generic synthroid online price, the spread can cause issues if you are not aware of how it works. The fact that you can only see the BID price on your charts is where the problem arises.
Entry Orders and the BID ASK Spread
Since you use one price to buy and another price to sell, buying and selling a currency pair while using a chart that only shows you one price can get a little weird.
When you are selling, there are no troubles, it’s as straight forward as it can get. You find a price on your chart you like to enter, place your entry order for that exact price and when the chart touches that exact price you get entered into the trade. Your spread is taken from you and because of that you get bumped to the ASK line.
When you are buying, however, marking an exact price on the chart and placing your entry order at that price will result in you getting into the trade too early. Remember you will be buying so you are using a different price. What you want is to be looking at the ASK line as your point of reference because when price touches the ASK price you will be entered into the trade, your spread will be removed from you and you will be bumped down to the Bid price.
It’s this bumping from one line to the next that has traders confused. You will hear that the BID price is where you buy and you will also hear that the BID price is where you sell. Depending on how you look at it, both can be right.
When you are placing a buy entry order, to get in at the price you want on the chart, you have to add the spread to your entry price. If you see on the chart that you want to get into a trade at 1.5000, you will have to add the spread (2 pips in this example) and make your entry at 1.5002. Now, when price on the chart hits 1.5000, you will be entered into the trade.
Those last few paragraphs may be very confusing, read it several times, and if you still don’t get it that’s ok. Most traders never understand this aspect. Simply put:
Add the spread to your Buy entry orders.
Do NOT add the spread to your Sell entry orders.
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