Bid/Ask Spread
Tue, Apr 15The bid/ask spread refers to the difference between the bid price and the ask price. The “ask” price is also referred to as the “offer” price. This spread represents the disparity between the prices set by buyers and sellers.
The “bid” indicates demand, while the “ask” signifies supply for an asset. In simpler terms, it reflects what a buyer is prepared to pay compared to what a seller is willing to accept for a sale. The spread itself constitutes the transaction cost.
“Price takers” purchase at the ask price and sell at the bid price, whereas “market makers” buy at the bid price and sell at the ask price. In the context of forex trading, you are classified as a price taker, while your forex broker acts as the price maker, or market maker.
This means that the BID represents the price at which the forex broker is ready to buy the base currency from you in exchange for the counter currency. Conversely, the ASK price is the amount at which the forex broker is willing to sell the base currency to you in exchange for the counter currency.
For you, the price taker, the SPREAD is the difference between the buy (ASK) and sell (BID) prices.
A simple analogy is to imagine visiting a car dealership. You spot a car you like and ask about its price. The car dealer “asks” for $20,000. Notice that the “ask price” is from the car dealer's perspective, indicating they are willing to sell the car for that amount.
Now, suppose you are interested but want to trade in your current vehicle, a truck. The car dealer “bids” $5,000 for the truck. Again, the “bid price” is from the car dealer's viewpoint, meaning they are prepared to buy the truck from you for that price.
If you believe you can secure a better price for the truck, you are free to seek “bids” from others as well. Your forex broker operates similarly to the car dealer, allowing you to apply these concepts in forex trading.
In summary, the spread is the difference between the buy (ask) and sell (bid) prices displayed on your trading platform and is incurred when opening and closing a position.
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