Bid vs. Ask: How to Read Quotes and Lower Trading Costs

Do bid and ask prices in forex confuse you? Not sure why your trades start negative right out of the gate?

You’re not alone. When I started my trading journey over 20 years ago, the idea of two separate prices for a market was puzzling, to say the least.

The good news is that you’re in the right place to figure it out.

In this guide, you’ll learn everything you need to know about bid and ask prices, as well as spreads. You’ll understand why they exist, who and what influences them, and how you can pay your broker less every time you trade.

If that piques your interest, let’s get started!

What Are Bid and Ask Prices in Forex?

In forex, the bid is the price at which you can sell, and the ask is the price at which you can buy; the difference between these two prices is the spread.

How can a market have two prices? It sounds odd at first, but the bid and ask are pretty straightforward.

The bid is the maximum price a buyer agrees to pay. It’s often called the “buy price” or “buying rate.”

On the other hand, the ask price shows the lowest offer a seller will accept. It’s also referred to as the “offer” or “offer price.”

For the most part, the bid and ask only play a role when entering or exiting a market. The rest of the time, such as when viewing a price chart, you will only see one price at a time.

Bid Price vs. Ask Price vs. Current Price

In forex, the bid is the price at which you can sell a currency pair. The ask is the price at which you can buy. The gap between these prices is the spread, which gets passed on to you as a transaction cost.

The “current price”, as the name suggests, is the last traded price of a market. It’s sometimes the price you see when viewing a price chart from your broker, unless they’re showing the bid price instead.

However, if you open the order or quote page with your broker, you’ll see the bid and ask prices listed separately. It gives you more control over your order depending on your strategy and needs. More on that later.

What is the Bid-Ask Spread?

The bid-ask spread is the distance between the ask price and the bid price. It shows how many pips separate the ask price from the bid price.

The spread is your built-in transaction cost. When you place a new trade, it will start in the red due to the spread. The wider the gap between the bid and ask, the more you are likely to pay upfront.

You can see now why paying close attention to the spread you pay is so crucial. Being down $100 on a trade you just entered is no fun.

Major pairs like EURUSD and GBPUSD have tighter spreads because they are highly liquid. That’s another way of saying they’re popular. Exotic pairs, such as USDTRY (US dollar vs. Turkish lira), are less popular, so their spreads are wider, which means higher transaction costs for you.

How to Calculate the Spread in Forex

Let’s assume your broker quotes EURUSD at 1.1000 / 1.1002. The spread is the difference between the two, or 0.0002, which equals two pips.

Remember that a pip is always the fourth digit to the right of the decimal point. The fifth number you see from your broker is fractional pips.

Now, let’s examine the cost. For a standard lot (100,000 units), one pip is worth $10. So a two-pip spread costs $20 for every standard lot traded.

With a mini lot (10,000 units), one pip is worth $1. That same two-pip spread would cost you $2. And with a micro lot (1,000 units), one pip is worth just $0.10. So the same two-pip spread costs just $0.20.

The bigger the lot size, the more expensive the spread becomes; the smaller the lot size, the lower the cost.

Simple enough? Let’s move on to the factors that influence these prices in the forex market.

What Affects Spreads in Forex?

Liquidity is the number one factor that affects spreads. Major currency pairs, such as EURUSD and GBPUSD, have the tightest spreads. On the flip side, exotic pairs like USDTRY tend to have much wider spreads.

Volatility also plays a role. During high-impact news events or thin market sessions, spreads can widen quickly. You should always avoid entering the market during high-impact news events for this reason.

Time of day is another factor. The London and New York overlap has the tightest spreads, while the Asian session often sees them widen. You can still trade the Asia session, but pay special attention to the spread before entering a trade.

Lastly, your broker’s pricing model matters. ECN brokers use raw spreads plus a commission, whereas market makers typically incorporate costs directly into the spread. If you want a narrow bid-ask spread, stick with ECN brokers.

The #1 rule is to choose popular currency pairs to trade. If you stick to the major pairs, such as EURUSD and GBPUSD, the factors above will have a limited effect on the spreads you pay.

Who Sets Bid and Ask Prices in Forex?

In the forex market, banks and large liquidity providers quote both the bid and ask prices. They’re the ones making the actual market.

Your broker then streams those quotes to you. Some brokers add a small markup, which they include in the spread.

ECN brokerages work a little differently. They pass raw quotes straight from liquidity providers and charge a commission, rather than widening the spread.

Market makers also compete with one another. That competition is why spreads on major pairs stay so tight. On the other hand, exotic pairs like our USDTRY example have less competition among market makers and, therefore, have wider spreads.

How Order Types Affect Forex Spreads

When you place a market order, you buy at the ask price and sell at the bid price. That means you always pay the spread right away.

Limit orders help you avoid paying large spreads by letting the market come to you. You’re paying the “best” price rather than using a market order to enter the market quickly. The trade-off is that there’s no guarantee your order will get filled.

Scalpers often use market orders, so spreads have a greater impact on their profitability than on that of swing traders. Since scalpers make many quick trades with small targets, spreads eat into their profits more quickly. Alternatively, swing traders hold positions longer and are less affected by spreads.

For example, if the spread costs you $10 per trade on a standard lot, a scalper making 20 trades in a session pays $200 in spreads alone. A swing trader making one trade in the same lot size only pays that $10 once.

Bid vs. Ask Price Across Currency Pairs

Majors like EURUSD, GBPUSD, and USDJPY have the tightest spreads. With an ECN broker, the spread is usually less than one pip.

Minors have moderate spreads. You’ll see them a few pips wide, more expensive than majors, but still reasonable.

Exotics are a different story. Spreads can be 10-50 pips or more, which can be expensive and impractical for most retail traders.

For example, a 20-pip spread on an exotic pair costs $200 using a standard lot. That’s before the trade even moves.

So, stick with the major currency pairs. You can experiment with a minor pair here and there, but I’d avoid exotic pairs at all costs.

How to Reduce Spread Costs in Forex

One of the best ways to reduce spread costs is to trade the majors. They’re the most liquid, especially during the London and New York session overlap.

Choosing the right broker can also reduce trading costs. ECN and STP brokers offer lower, more transparent spreads compared to market makers.

Avoid trading during big news spikes. Spreads can widen fast, and the added cost can wipe out small profits.

Lastly, think about the timeframe you trade. On higher timeframes, spreads become less significant compared to short-term trading. For example, a one-pip spread will eat $10 from a scalper’s $40 profit, but the same one-pip spread is barely a factor for a swing trader making $500 on a trade.

How to Trade Using the Bid and Ask Prices

Every trade comes down to the bid price and the ask price. When you place a market sell order, you hit the bid price, the highest price buyers are offering.

When you place a market buy order, you pay the ask price, or the lowest price sellers are willing to accept.

The difference between the two is the bid-ask spread. That spread is small in major currency pairs but wider in less liquid financial markets. Understanding and respecting it means paying lower transaction costs every time you trade.

Consider the current price displayed on your platform as the midpoint where market participants are negotiating.

However, you’ll never trade at that “middle” number. You’ll always enter at either the lowest price buyers are offering (the current bid) or the highest price sellers are asking (the ask).

So, how does all of this make you a better trader?

For active trading, limit orders give you more control. Instead of jumping in at the current market price, you can set the exact level you want to target. If you want instant execution, you’ll pay the spread. However, a limit order can reduce trading costs if you’re patient.

Understanding the bid, ask, spreads, and how it all works isn’t just about learning definitions. It’s about taking control of how you enter the market and what you pay your broker.

Stocks, Commodities, and Cryptocurrencies

All financial markets have two prices for every asset. That’s because you need two parties to make a transaction in the financial markets.

In the stock market, an individual stock like Apple (AAPL) has a bid and ask price. The same goes for stock indices like the S&P 500 and Nasdaq.

The same rules apply to the spread. More liquid stocks like Apple and Microsoft will have narrower spreads, while less traded small-cap stocks like Atea Pharmaceuticals will have wider spreads.

Commodities like gold and silver also have a bid and ask. Their spreads are usually pretty tight unless there’s a high-impact news event or during illiquid hours.

However, less traded commodities like palladium and orange juice often have wider spreads.

Last but not least are cryptocurrencies. Big names like Bitcoin and Ethereum have the tightest spreads available, while less popular cryptos will usually have wider spreads.

Common Mistakes to Avoid

The number one mistake traders make is not checking the spread before placing a trade. They assume it’s a non-issue until they’re down hundreds of dollars from the start. Always check the spread before placing a trade; never assume.

Another mistake is trading exotic pairs. The wider spreads on these currency pairs can create hidden costs that quickly eat into profits. For example, a 20-pip spread on a standard lot costs $200 before the trade even moves. Avoid exotic pairs at all costs (literally). There are plenty of trade setups on the majors and minors.

Lastly, traders often get caught entering during illiquid hours, such as the Sunday open or late Friday sessions. Spreads widen during these times, making trades more expensive.

You can avoid every mistake above by checking the spread before you place a trade. Do that, and you’ll be ahead of 90% of other traders.

Conclusion

Whether you’re a swing trader or scalper, understanding the bid, ask spread, and how it all works is crucial for your success. You can’t expect to be in control of your trading costs if you aren’t familiar with these terms.

Your goal should be to pay the least amount of spread possible. That starts with monitoring the bid and ask prices, especially before entering a trade.

By choosing the right ECN broker, trading during the optimal times (New York and London sessions), and managing your lot sizes, you can keep spread costs under control. It’s a small detail, but over time it will make a big difference in your trading results.

Frequently Asked Questions