Bid/ASK Spread in FX

FX Strategy Articles > FX-guides

Even though all forex trades involve the simultaneous buying of one currency whilst selling another, it is much easier to think of a currency pair as a single unit, or an item that is bought and sold.

To make things even more complicated some genius created the terms bid price and ask price. The Bid price is simply the buy price and the ask price is sell price.

The bid or (buy price) represents how much of the quote currency is needed for you to get one unit of the base currency. The ask or (sell price) for the currency pair represents how much you will receive of the quote currency for selling one unit of base currency.

That might all sound a little complicated so lets run through an example using the EUR/USD currency pair:

In this example the Euro, being the first currency displayed, is the base currency and the USD is the quote currency.

If the price of the EUR/USD currency pair is quoted as being EUR/USD = 1.4002 and you purchase the pair, this means that you buy 1 Euro and need to spend 1.4002 USD to receive that 1 Euro.

If you sold the currency pair, you want to sell your EUROs in order to receive US dollars. For every 1 euro you sell you will then receive1.4002 USD.

Now of course the broker will want to make some money for facilitating these transactions. So that’s why when the broker sells you a currency they add a little bit to the price they paid and if they buy it from you they reduce a little bit from the asking price so that they can on sell it at a profit. This is similar to currency exchanges at the airport when you go on holiday.

The spread is quoted in PIPS which we explain in more detail in a different guide. So in our example we would say the spread is 2 PIPS.

To summarise: Instead of charging you a commission - the brokers invented what is called a ‘spread’. The spread is the difference between the bidding price and the asking price and it always close to the actual price. The close the bid and ask are to one another the smaller the spread. The spread is measured in PIPs.

Published on 12th of April 2011
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