The first thing newbie traders need to be aware of is the absence of a single price for a specific asset when it comes to the foreign exchange market. Instead, there are two price values: the ask and the bid. The difference between them has a great significance too.
In today’s article, we are going to get to the bottom of these fundamental concepts. After reading it, you will have a good knowledge of the ask and the bid prices and will know how to use them in trading.
1. Ask, Bid and Pricing: Here’s What You Should Know
2. How to Use Ask, Bid, and Spread in Trading
3. Applying Ask and Bid like a Pro, or a Penny Saved is a Penny Earned
Before exploring the essence of the forex ask and bid, let’s recall the price formation process in the market. There are buyers who wish to purchase the goods at the cheapest price available. And then there are sellers who intend to sell it at the highest price. If neither of them agrees on a mutually acceptable price, the deal will fall through. This is why they need to negotiate.
In the foreign exchange market, it is done in a similar fashion:
As far as the stock exchange goes, you can view the bid and the ask prices in the Market Depth. This is a table displaying the buy and sell orders placed by the market players. The spread is essentially a corridor between the bid and the ask prices. As soon as it grows more narrow, the order gets executed and the trades are made.
In the foreign exchange market, regular traders cannot access the Market Depth. However, you can easily see the ask and the bid prices in the Market Watch window.
There are several applicable aspects concerning the usage of ask, bid, and spread when trading in the foreign exchange market. Here’s what traders need to know and understand:
1. Forex charts are built at the bid price.
2. In the settings of MetaTrader 4 and MetaTrader 5 trading terminals, you can customize the way the ask price will be displayed. It will be shown as a red line in the chart while the bid will be highlighted in gray.
3. The spread shows the area between the ask and the bid lines in the chart.
4. Long positions will be opened at the ask price.
5. The trades whereby the asset is sold will be made at the bid price.
When considering the above factors, doing technical analysis, drawing key price levels, and making trades, keep in mind that positions can be opened in different places depending on the price movement direction. This means that when you place pending orders, stop loss and take profit, you should remember what the exchange rate of the bid and ask is, and factor in the spread.
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So, how do you make more money by using your knowledge of the ask and the bid prices? The key rule is to take spread into consideration when making trades. This seemingly small aspect can sometimes play a crucial role in the outcome of your trade and whether it will be losing or winning even in cases where the initial forecast was accurate! Keep the following in mind whenever you open positions:
1. The long positions (purchase of an asset) will be opened at the ask price. It’s best to enable the display of the ask line in the chart settings right away so that you can clearly see and understand where this price will be from the technical analysis standpoint.
2. The short positions (sale of an asset) are opened at the bid. Factor this in when placing stop loss and take profit. Don’t be greedy and scale it up for the spread! More often than not, traders complain that stop order kicked them out while the forecast worked out, or the spread was not enough for the take profit to get triggered.
3. In a similar fashion, the short positions are opened at the bid price. Keep that in mind when placing pending sell orders knowing beforehand where the price should be based on the technical analysis. When the sell order is closed (manually, according to stop loss or take profit), it means the asset is sold at the ask price.
4. The ask is the price at which you buy the asset from the seller and so it is higher. The bid is the price at which you sell the asset and it is always cheaper.
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