Guide to Bid Price and Ask Price in the Forex Market

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EnclaveFX
Sep 10, 2022
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The negotiating process is one of the critical elements of every trade, including Forex, commodities, stocks, etc. It occurs when buyers and sellers of a particular asset strive to decide on the asking price that will best meet their demands.


In this bargaining procedure, traders and service providers quote (offer) the bid and ask prices. In essence, a bid represents the highest bid price a buyer is ready to pay for an asset, whereas an ask represents the lowest amount a seller is willing to accept for an item they are the owner of.

After exchanging bid prices and ask prices on particular assets, a price agreeable to buyers and sellers is ultimately reached. Typically, buyers prefer to pay the least amount for a purchase, while sellers want to sell it for the most money.

Usually, the asking price is higher than the bid price, and the reverse is also true. A spread is a distinction between the ask and bid prices in the foreign currency market.


Investors desire payouts.

Every trade is motivated by the desire to profit from the activity, which is why people engage in online forex trading. Whether we are discussing service providers or individual traders, they all want to acquire and sell shares at an asking price that is advantageous to them.

And the two parties—the buyers and the sellers—engage in a negotiating process to come to those bid prices. The bid price and ask price in Forex are two of the most crucial components of every trade we come across. Here is how they function:


A buyer of a particular asset offers a bid price. A buyer of an item is presented with an asking price, which is the highest bid price they are ready to pay for it. Typically, they work to make it as low as possible. It stands for the least amount of money the buyer will accept in exchange for it, and they typically demand the highest price feasible.

Example of an ask and bid quotation:

Assume Josh, a trader, wishes to purchase the USD/JPY currency pair for, let's say, 100,000 Japanese yen. Additionally, after buying the couple, he will hold off on selling it until the exchange rate between the bid and ask rises to get paid. To do that, Josh locates a service provider—a broker—who offers Josh satisfactory online forex trading conditions.

One would anticipate that the USD/JPY pair's buy and sell prices would equal. Josh should be able to sell the same number of yen and receive 100,000 yen back if he spends roughly 911 dollars at the 109.69 asking price, right?

Although it may appear reasonable to many, that is not how this system operates. The two bid and ask prices are distinct from one another and not the same ask Forex price offered.

Thus, if Josh purchases 911 dollars at a bid price of 109.69, it will likely be the maximum sum he will receive from the suggested trade of 100,000 yen. Josh will likely receive less money if he chooses to sell the dollars and acquire the yen once more.

Let's assume, for this illustration, that the starting bid is 109.67. This indicates that Josh will receive 99,909 yen back from the buyer, providing the general exchange rate was unchanged at the time.


What exactly does it mean to purchase or sell a currency pair?

The function of the bid and ask prices is demonstrated by using Josh and his online forex trading history on the foreign currency market as a real-world bid and ask price example. One more point needs to be made clear: when we refer to the Forex bid ask price and also name a specific currency pair, such as the USD/JPY mentioned above, it signifies that we are purchasing US dollars with Japanese yen. Buying a currency pair generally entails using the second currency, the base currency, to buy the first currency in the pair.

 

Let's now discuss the bid price range that both buyers and sellers of these assets find acceptable. As we established previously, the bid price is the highest that a buyer is willing to pay for an item. This indicates an ask price threshold above which a buyer (often a broker) cannot afford to purchase the item. Additionally, since every broker seeks to acquire assets at the lowest possible cost, they attempt to reduce the bid price by haggling with the seller.

However, as you are already aware, the asking price is the lowest amount a seller will accept from a buyer in exchange for an item.


Additionally, if the bid price is too low, it's not worth selling. As a result, the asking price is essentially the same as the offer price, which is a set sum made to the seller of a pair.

To arrive at a price satisfactory to both parties—sufficiently high for sellers and enough low for buyers—traders and service providers negotiate.

Who profits from the difference between the ask and bid prices in Forex?

The bid price is nearly always less than the asking price, which is most evident from this example. This is so because the service providers and brokers are paid based on the difference between the bid and ask prices.


To return to our previous example of a bid-ask, a provider offered Josh an asking price of 109.69 but dropped the bidding price to 109.67, resulting in a difference of 0.02 - or two pips for JPY-based pairings - that led to a payout. Therefore, the trade resulted in a service provider receiving $2 in real money.

A spread is the price differential between the ask and bid prices. Brokers and other Forex service providers often don't charge commissions for online forex trading. This is so that spreads, which give the broker financial support, can accomplish the same objective.

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