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THE MEANING OF BID and ASK IN FOREX
23 August 2017
When you start your Forex trading, there are some basic definitions that require some basic knowledge of finance in general and others that are more specific concerning the currency market.
For example, we can find the definitions of bid and ask also on other markets such as equities and bonds thus making the understanding of an order mask easier to a new forex trader too.
Brokers provide real-time bid ask quotes of the major currency pairs, including the amount that the broker will keep as a trading commission.
In fact, unlike other markets, bid ask spreads in forex must also take into account the percentage of profit for the broker who has no other opportunity to get a profit but the difference between the purchase and sales price.
The Bid value is the price at which you can sell on the market that particular currency pair, while the Ask value indicates the best selling proposal offered by the market at that precise moment, or the price of that currency pair.
An element not to be underestimated is represented by the fact that, for example, in the EUR / USD symbol the first currency is called the Base Currency, while the other one is called Quote Currency.
So what does "buy EurUsd cross" mean? When you buy (long position) the trader has to refer to the Ask price which is the highest price that appears on the book. So, if we are facing an Ask at 1.3550, this means we need 1.3550 dollars to buy one Euro. On the contrary, if we want to open a short position, we will refer to the price of the Bid; if we find in the same book a Bid of EurUsd at 1.3548, this means that we can sell (short) EurUsd at 1.3548.
The exchange rate represents the number of units of secondary currency (U.S. dollar) that we get by selling a single base unit (Eur).
The Dollar doesn't always represent the minor currency; for what concerns changes such as UsdJpy or UsdCad, the exchange rate will represent how many units of minor (Cad or Jpy) you will receive from the sale of a single base unit (Usd).
Back to the Eur/Usd cross, when we open a long position (buy), obviously we assume a rising scenario in the exchange rate while if we open a short position (sell), then we will assume a falling scenario in the exchange rate.
A final clarification is concerning the words long and short, perhaps the most widely used in the forex market due to the peculiar characteristic of a market where you can bet on the same terms upward or downward.
The word "long" identifies a purchase, or a trade where the operator buys a certain currency pair and is expecting a rise in the value.
The word "short" instead indicates a bet on the downside of a certain currency pair, selling at a certain price level and trusting in a reduction in value.