Bid and ask meaning in forex
Bid and ask price represent the best price at which a security can be sold and/or bought at the current time. In simple words, the “bid” price is for the buying side, and the “ask” price for the selling side.
There are different types of securities that can be traded in a financial marketplace. In the forex market, the currencies of different countries and the forex rates are the securities that are traded in the market. In financial markets, especially the forex market, most buyers and sellers like businesses and investors will not interact with each other directly. Instead, the trades in securities like forex will be routed through intermediaries like traders and dealers who will purchase and sell the security on behalf of their client.
Since the traders and dealers are taking a risk in purchasing and selling the forex, there is likely to be a difference in the value of prices at which the security will be purchased and sold. Typically a forex trader will offer a lower price for a currency if he is purchasing it and sell it at a higher price to the currency buyers to compensate for the risk he is taking when investing his money in the currency at a particular time. Hence, those dealing in forex should be aware of the bid and ask for meaning in forex since these terms are frequently used by those selling and buying forex.
What is Bid price?
A bid price represents the buying price level for which the trader is willing to BUY some asset, for example, stocks, currency, commodity, etc. The forex’s bid price is the maximum exchange rate that a forex trader can pay for the currency pair.
The forex buyer will always be interested in paying the lowest price for the currency he wishes to purchase and will specify the lowest bid price. This bid price will be considered by forex traders who wish to sell the specified currency. However, the currency will only be purchased when the currency buyer can find a seller who is willing to match his bid price. If the buyer cannot find a seller matching his bid price, he may have to increase it.
What is the ask price?
An ask price represents the selling price level for which the trader is willing to SELL some asset, for example, stocks, currency, commodity, etc. Ask price or offer price is the lowest price that the forex dealer or trader is willing to sell the currency for.
Often, the forex dealer acts on behalf of a business that sells a particular currency that it has received as payment for a product or service sold. The dealer will usually look at the bid price of the currency to set the asking price. A deal will be finalized when the forex dealer finds a trader willing to pay the asking price. Though the dealer would want to maximize his profit, setting the asking price high as possible, he will find it difficult to find a buyer for currency if the price is much higher than the market rate.
Bid and ask price foreign exchange example
Here are below bid, ask price, spread example:
Understanding the bid, ask price
The bid and the asking price are important for those who wish to deal in forex since they indicate the rates at which a transaction is likely to get finalized. The forex trader who wishes to purchase currency will find that he is paying the price higher than the currency’s current selling price since transaction costs are involved in every trade. The bid’s information and ask the forex buyer or seller uses prices provided by the various forex traders and dealers to choose the trader or dealer offering the best possible price.
Please read How to Show Bid and Ask Price on MT4.
The bid price indicates the transaction cost that a person will incur if they purchase a currency and sell it immediately. The bid and ask price will also depend on the economy of the country, financial stability. In some countries, the inflation rates are high, and the currency value is decreasing rapidly. In these cases, forex traders will find it difficult to find buyers for the country’s currency. Hence if they are investing in this currency, they will usually keep the asking price higher.
The difference between the bid and the asking price for a particular currency pair is called the forex spread or bid-ask spread. It indicates the market liquidity, how easy or difficult it is for a seller to find a buyer willing to pay the price he requires. When there is a lot of liquidity in the market, the spread will be low, and when there is less liquidity in the market, the spread will be higher. When forex markets are open, the spread for major currency pairs like the USD/Euro will below. On weekends, major forex dealers are closed, reducing the market’s liquidity, and the spread will also be higher.