Bid, Ask, and Spread: The Trading Costs You Must Know

Writer
Jan 19
2 min read

Bid, Ask, and Spread: Understanding Trading Costs in Forex

In the previous chapter, we discussed the opportunities and freedom Forex offers. But before you start generating profit, you must understand your "Trading Costs." In the Forex world, we don't typically pay a flat commission like a traditional bank; instead, we deal with something called the Spread.

1. What are Bid and Ask?

When you look at a currency pair on your platform, you will always see two different prices (just like at a currency exchange booth at the airport).

Bid Price (Sell Price): This is the price the market is willing to "buy" from you. In other words, it is the price you get when you click Sell.
Ask Price (Buy Price): This is the price at which the market "offers to sell" to you. This is the price you pay when you click Buy.

Pro Tip: The Ask price is always higher than the Bid price. You always buy slightly higher and sell slightly lower.

2. Spread: The Cost of Doing Business

The Spread is simply the difference between the Ask price and the Bid price.

Formula: Ask - Bid = Spread

Why does Spread matter? Spread is the primary source of income for brokers and your immediate "cost" the moment you enter a trade. You’ll notice that as soon as you open an order, it starts in the "negative." That negative value represents the spread you've paid to the broker.

3. Types of Spreads

Fixed Spread: The difference remains constant regardless of market volatility. This makes cost management predictable.
Floating (Variable) Spread: The spread fluctuates based on market conditions. During high-impact news, the spread may "widen" significantly, though it is usually lower than a fixed spread during normal market hours.

Discipline in Entry: The Discipline Message

A disciplined trader doesn't trade just because they "want to." They trade when it is cost-effective.

Avoid High Spread Windows: Such as early Monday morning (market open) or during major economic news releases when spreads can spike.
Choose High Liquidity Pairs: Major pairs like EUR/USD typically offer the lowest spreads, allowing you to reach the "break-even" point and move into profit faster.

"Reducing your costs is an instant way to increase your profits without waiting for the market to move."

Next Lesson: Now that you understand pricing, we will learn how to measure price movement using Pips and Points. This will allow you to calculate your potential profits and losses with mathematical precision.