Ask Price vs. Bid Price in Forex​: What’s the Difference?

 If you’re planning on becoming a funded trader, two terms that you need to be familiar with are ask price and bid price, and by extension, the bid-ask spread. 

In simplest terms, the bid price is what you’ll receive from a buyer if you’re selling a currency pair, and the ask price is the price you’ll pay to buy a currency pair, with the bid-ask spread being the difference between them. 

The bid-ask spread is an important concept to master, affecting profit margins and your bottom line. Keep reading to learn the difference between ask prices and bid prices and how they affect your ability to make profits as a Forex trader.

Let’s start by defining what bid and ask prices are. 

Contents

• Key Takeaways
• Bid Price, Ask Price, and Bid-Ask Spread
• How Bid-Ask Spreads Reflect Market Sentiment
• Using Bid-Ask Prices in Trading
• How Does the Bid-Ask Spread Work in Forex Trading?
• Are Low Spreads or High Spreads Better in Forex Trading?
• Which Currency Pairs Have the Lowest Spreads?
• How Does the Bid-Ask Spread Change During Different Trading Sessions?
• Tips for Managing the Bid-Ask Spread in Forex Trading
• Final Thoughts: Forex Trading and the Bid-Ask Spread
• Frequently Asked Questions

Key Takeaways

• The bid price is the highest price a buyer is willing to pay, while the ask price is the lowest a seller will accept.
• The bid-ask spread, the difference between bid and ask prices, impacts trading costs and profitability.
• Tighter spreads are cost-effective, especially for short-term traders who rely on quick, minor price movements.
• Major currency pairs like EUR/USD generally have lower spreads due to higher liquidity.
• Trading during the London and New York sessions can lead to narrower spreads and reduced transaction costs.
• Using limit orders can help control entry prices and avoid unfavorable spreads during volatile periods.

Bid Price, Ask Price, and Bid-Ask Spread

In Forex trading, two prices are always quoted for each currency pair: the bid price and the ask price, with the difference between them being the bid-ask spread. 

Here’s an easy explanation: 

Bid Price

The bid price represents the maximum price a buyer will pay for a currency pair. You'll receive the bid price when you want to sell a currency pair. A simple way to remember this is that this is the price you receive when you “bid farewell” to a currency pair. 

Ask Price

On the other hand, the ask price is the minimum price a seller is willing to accept for a currency pair. You'll need to pay the ask price when you want to buy a currency pair. You can remember this because you pay the price when you "ask" for the currency pair.

So, if the bid price is the most a buyer is willing to pay for a currency pair, and the ask price is the least a buyer is willing to accept for a currency pair, then what’s the spread? 

Spread

The spread, also known as the bid-ask spread, is the difference between the bid and ask price. The tighter the spread (the smaller the difference between the bid and ask price), the less you'll pay to enter and exit trades. As you’ll see further below, the spread can significantly impact profit margins. 

Example of a Bid-Ask Spread

To help you understand this concept better, let’s go through an example of what a bid-ask spread might look like using the EUR/USD currency pair. 

If the bid price for EUR/USD is 1.1200 and the ask price is 1.1202, the bid-ask spread would be 0.0002, or 2 pips. 

If you wanted to buy Euros with US Dollars, you would do so at the ask price of 1.1202. If you wanted to sell your Euros for US Dollars, you would receive the bid price of 1.1200. The 2-pip spread is the cost of making the round-trip trade.

How Bid-Ask Spreads Reflect Market Sentiment

Bid-ask spreads play a critical role in reflecting market sentiment, offering insights into liquidity, volatility, and overall market confidence. By analyzing the spread, traders can better understand the current state of the market and the balance between buyers and sellers.

Let’s discuss how the bid-ask spread reflects market sentiment in terms of narrow and wide spreads. 

Narrow Spreads Reflect Confidence

Narrow spreads typically indicate high liquidity, low volatility, and strong market confidence. In such conditions, there is a greater alignment between buyers and sellers, allowing fort efficient trading with minimal price discrepancies. 

These spreads are often seen in stable markets where participants are confident in the direction or stability of asset prices.

Wide Spreads Reflect Hesitance

On the other hand, wide spreads reflect market caution, heightened uncertainty, or stress. 

They often arise during periods of low liquidity or high volatility when the disparity between what buyers are willing to pay and what sellers demand increases. This divergence can signal market participants' hesitance or differing opinions about an asset’s value.

By understanding how bid-ask spreads mirror market sentiment, traders can gain deeper insights into prevailing market dynamics and adjust their strategies accordingly.

Using Bid-Ask Prices in Trading

Most trading platforms display real-time bid and ask prices for various currency pairs, allowing traders to track these shifts in market sentiment. 

Moreover, many platforms allow you to place limit orders at specific bid or ask prices. This feature gives you more control over your trades by setting predetermined entry or exit points, ensuring you only trade at prices that align with your strategy.

By monitoring the bid-ask spread alongside price movements, you can better understand market dynamics and make more informed decisions, thus improving your chances of becoming funded. 

Join Photon Trading to learn more about incorporating these concepts into your greater trading strategy. 

Now that we’ve covered the basics, you might be wondering who sets these ask and bid prices. 

How Does the Bid-Ask Spread Work in Forex Trading?

In the forex market, the bid-ask spread is set by market makers, typically large banks or financial institutions. These market makers constantly quote both bid and ask prices for currency pairs and stand ready to buy or sell at these prices.

The size of the bid-ask spread can vary depending on market conditions that influence the ask and bid prices set by these market makers. For example, liquidity plays an important role in the bid-ask spread. 

Highly liquid currency pairs like EUR/USD or USD/JPY will generally have tighter spreads than less frequently traded pairs. Spreads can also widen during high volatility or low liquidity, such as during major news events or off-peak trading hours. 

Seeing as spreads can be wider or narrower, you’re likely wondering which is better for making profits. 

Are Low Spreads or High Spreads Better in Forex Trading?

When trading Forex, the spread directly impacts your trading costs and profitability. Choosing a trading environment with narrower spreads is typically advantageous, and here’s why:

Wider Spreads

A wider spread means you pay more to enter and exit a trade. For every trade, you need the market to move further in your favor before you can break even, let alone make a profit. 

This high cost of entering positions can have significant impacts on short-term traders who rely on frequent trades with small price movements. Wide spreads eat into their profits quickly.

Furthermore, even a few extra pips in the spread can translate to a significant cost for traders placing large positions.

For example, if the spread on EUR/USD is 5 pips and you trade one standard lot (100,000 units), the cost to open and close the trade is $50. If the spread narrows to 1 pip, the same trade would cost only $10, significantly reducing expenses.

Narrow Spreads

Narrow spreads, on the other hand, mean lower transaction costs. This is particularly beneficial because with lower costs to cover, traders can achieve profits with smaller price movements.

Moreover, narrow spreads mean you reach the point where your trade becomes profitable more quickly, making it easier to capitalize on minor market fluctuations.

This goes one step further because the narrower spreads allow for easier risk management. Lower costs reduce the overall impact of trading fees on your capital, leaving more room to manage risks effectively.

Considering that narrow spreads are best, you need to know which currency pairs have the lowest spreads to start making money and potentially become a funded trader. 

Which Currency Pairs Have the Lowest Spreads?

The size of the bid-ask spread varies across different currency pairs. In general, the most actively traded forex pairs have the tightest spreads. These are known as the major currency pairs and include:

• EUR/USD (euro/US dollar)
• USD/JPY (US dollar/Japanese yen)
• GBP/USD (British pound/US dollar)
• USD/CHF (US dollar/Swiss franc)
• AUD/USD (Australian dollar/US dollar)
• USD/CAD (US dollar/Canadian dollar)
• NZD/USD (New Zealand dollar/US dollar)

If there are major currency pairs, there must also be minor currency pairs. Let’s distinguish between the two in terms of spreads.

Major Currency Pairs

Among the major currency pairs, EUR/USD, USD/JPY, and GBP/USD typically have the lowest spreads. This is because these pairs have the highest trading volume and liquidity, which allows market makers to offer tighter spreads. 

Minor Currency Pairs

We then have minor pairs, also known as exotic pairs, which are the less frequently traded currency pairs. These generally have wider spreads. 

These can include pairs like USD/SEK (US Dollar/Swedish Krona), USD/MXN (US Dollar/Mexican Peso), or USD/ZAR (US Dollar/South African Rand).

There is then a third type of pair known as the cross pair, as detailed below. 

Cross Currency Pairs

Cross currency pairs, which don't include the US Dollar, can also have slightly wider spreads than the majors. Examples include EUR/GBP (Euro/British Pound), EUR/JPY (Euro/Japanese Yen), or GBP/JPY (British Pound/Japanese Yen).

Keeping all of this in mind, one of the most important things you need to know if you want to become a funded trader is how the bid-ask spread changes during different trading sessions, and what other major factors affect it. 

How Does the Bid-Ask Spread Change During Different Trading Sessions?

The Forex market operates continuously 24 hours a day, five days a week, across four major trading sessions: Sydney, Tokyo, London, and New York. 

However, the bid-ask spread fluctuates throughout the day depending on market activity, liquidity, and other key factors. Understanding these changes is crucial for traders aiming to minimize costs and optimize their trading strategies.

Trading Sessions with Low Spreads

Spreads are typically at their narrowest during the London and New York sessions. These sessions overlap for a few hours, creating the most active period in the Forex market with the highest trading volume and liquidity. 

When more participants actively trade, market makers face more competition, which tightens spreads. For example, a major currency pair like EUR/USD might have a spread as low as 0.2 pips during this time. This period is ideal for traders who seek lower transaction costs and quick trade execution.

Trading Sessions with High Spreads

On the other hand, during the quieter periods between the New York and Tokyo sessions, spreads tend to widen. Liquidity drops significantly after the New York session closes, as fewer traders are active. 

Although the Sydney session opens shortly after, it does not generate the same volume of activity, particularly for major currency pairs. This reduced market participation allows market makers to increase spreads, especially on less popular currency pairs. 

Traders operating in this window should be cautious, as higher spreads increase transaction costs and may reduce the profitability of short-term strategies. To help you achieve the highest profit potential, let’s finish things off with some tips for managing the bid-ask spread. 

Tips for Managing the Bid-Ask Spread in Forex Trading

Now that you understand the bid-ask spread and how it works, let's look at some practical tips for managing it in your forex trading, such as choosing the right currency pairs, trading during the most liquid sessions, and using limit orders.

Here’s how to manage the bid-ask spread:

Choose Currency Pairs With Lower Spreads

Focusing on major currency pairs such as EUR/USD, USD/JPY, and GBP/USD can significantly reduce your transaction costs. Due to their high trading volumes and liquidity, these pairs typically have the tightest spreads, making them more cost-effective options for most traders.

Trade During the Most Liquid Sessions

The London and New York sessions are the busiest trading periods, with the highest liquidity and narrowest spreads. Planning your trades during these times can help you take advantage of more favorable trading conditions, reduce your overall costs, and improve trade efficiency.

Use Limit Orders to Enter Positions at Desired Prices

Rather than using market orders, which execute at the current bid or ask price, consider limit orders. With limit orders, you can set a specific entry price, giving you more control over when and at what price your trades are executed. This approach can also help you avoid unfavorable spreads during volatile market conditions.

Consider the Spread When Setting Stop-Loss and Take-Profit Levels

Always account for the spread when determining your stop-loss and take-profit levels. If the spread is wide, you may need to adjust these levels to ensure your targets are realistic and achievable, as failing to do so could increase the likelihood of premature exits or missed profit opportunities.

Factor in the Spread When Calculating Potential Profits and Losses

The spread can have a significant impact on your potential profits or losses. A wider spread means the price needs to move further in your favor for you to break even or turn a profit. By factoring the spread into your trading plan, you can set more accurate expectations and make better-informed decisions that align with your strategy.

Final Thoughts: Forex Trading and the Bid-Ask Spread

In Forex trading, mastering the concepts of bid and ask prices and understanding the bid-ask spread is crucial for managing trading costs and optimizing profits. 

Narrow spreads are generally favorable, reducing costs and making profitability easier to achieve, while wider spreads can increase expenses and require greater market movement to achieve profits. 

Choosing the right currency pairs, trading during peak sessions, and using limit orders are key 

strategies for managing spreads effectively. By learning these aspects of Forex trading, traders can improve their chances of becoming profitable and even achieve funded trader status. 

Understanding bid-ask dynamics will give you a solid foundation for a more informed and strategic approach to Forex trading, which is exactly what you can learn at Photon Trading. 

Get your free trading course + cheatsheets to improve your trading strategy today.

Frequently Asked Questions

What Factors Can Cause the Bid-Ask Spread to Widen?

Several factors can lead to a wider bid-ask spread, including market volatility, low liquidity, and off-peak trading hours. During major economic announcements or events that increase uncertainty, spreads may also widen as market makers adjust prices to manage risks.

Is a Narrow Spread Always Better for All Trading Strategies?

While narrow spreads reduce transaction costs, they may not always align with certain trading strategies. For example, long-term investors who hold positions for weeks or months may be less impacted by wider spreads than short-term or scalping traders, for whom lower spreads are critical for profitability.

How Does the Bid-Ask Spread Affect Stop-Loss and Take-Profit Orders?

The bid-ask spread impacts stop-loss and take-profit orders by affecting the price levels at which these orders are executed. If the spread is wide, it may result in trades being exited prematurely or profit targets being harder to reach, so traders often account for the spread when setting these orders.

Can the Bid-Ask Spread Be Negative?

A negative spread, where the bid price is higher than the ask price, is extremely rare in normal trading conditions. However, it can happen in highly liquid, competitive markets during periods of significant buying or selling pressure, but only momentarily before adjusting back to normal.

Why Do Exotic Currency Pairs Typically Have Wider Spreads?

Exotic currency pairs, like USD/SEK or USD/TRY, have wider spreads due to lower trading volumes and liquidity compared to major currency pairs. These pairs are less commonly traded, so there’s often less competition among market makers to offer tighter spreads.