Ask and Bid prices - another key to your profits in the market
On a currency exchange there is always a difference between the buy and sell price - the so-called spread. The price at which we can buy currency is called the Bid price, and the price at which we can sell it is called the Ask price. Everything works just like in a regular exchange office, only the selection and trading volumes are many times greater.
Why does the trader need this Bid and Ask price? In order to take into account this difference in their trading when placing stop-orders or for profit planning. And how many situations occur when the price has supposedly failed to reach 1-2 points of take profit! All this becomes clear if you correctly interpret the Bid and Ask price values.
Bid price and Ask price - points or money?
For stock trading it is more convenient to measure the spread in points, not in money. After all, the cost per point may be different for different currency pairs and volumes, as well as leverage and account type.
For example, at the current quote of the EUR/USD currency pair 1.2805 it is implied that the Bid price at which you are ready to buy EUR is equal to 1.2805, and the Ask price at which you are ready to sell EUR is equal to 1.2807. Therefore, the spread in this case will be 2 points.
We do not need to worry about who will buy our euro or who we will sell it to - all this is the broker's concern. As a trader who wants to make a profit on the exchange, we only need to always consider this price difference in any trading operation. Thus, we came close to the notion of spread and the choice of currency pairs for trading, taking into account the spread.
How do I know the size of the spread?
The value of the spread can be found out in several ways:
- by looking at the trading conditions on the broker's website.
- by selecting View → Market Overview or by pressing Ctrl+M.
- Finally, by simply starting to open a new order by pressing F9 or the button on the toolbar, we see both prices, BID and ASK, at once.
Why do many currency traders choose EUR/USD or GBP/USD? Not only because these pairs are actively traded and well volatile. The answer is also because of the small spread, which is 2 pips for the euro-dollar and 3 for the pound-dollar. Also the collateral on the euro will be slightly lower, since the pound is a more expensive currency.
The minimum spread is relevant primarily for traders engaged in scalping - The trade is a very short timeframe, from a couple of seconds to a couple of minutes, when the profit is 1 pip or more. Therefore, EUR/USD is the clear favorite by volume.
It should not be forgotten that this pair is also a reflection of the "confrontation" between the two world economies - the United States and the European Union. This means that the movements of this pair are closely related to almost any news, and the pair itself is moving well, providing an opportunity to earn money.
Bid price and Ask price - real trade
It should be understood that the real market price is always between the BID and ASC prices. After all, the seller wants to sell the currency (or other goods) at a higher price, and the buyer wants to buy the asset at a lower price. A price corridor is formed, and when the offers at a certain point coincide, a deal is made.
A specialist (a financial operator or a market maker) always sees not only the BID and ASC prices on the market, but also the so-called market maker, i.e., the volume of offers. Trading volumes are relevant to the stock market, not the market," you might say, but you would be wrong. Even on the stock market we can see the volumes of trade, but not separately, how much currency was bought and sold, but the total volumes. The real correlation between the sales and purchases is available only for a specialist.
In spite of this, trading volumes together with other important factors allows you to significantly improve your trading results.
Brokers and spread
It is interesting to know that broker's profit is formed from a part of the spread and commissions (sometimes). By opening a trade, the trader is already paying the spread by entering the market at a slightly unfavorable price. Part of the spread will be received by the broker, the rest he is obliged to give to a bigger broker (like a bank) as an intermediary between the trader and that big broker, and another part will be received by the one who invited you into the world (if there is one).
Understanding how spreads are formed and their role in trading is another key to your profits in the market.