The Bid-Ask Spread

FOREX prices are always quoted in the form of bid-ask-last trade. If you are a potential buyer, the ask is the price someone will sell to you. If you are a potential seller, the bid is what someone is willing to buy from you. You buy the ask and sell the bid in FOREX.

Market-maker brokers add their transaction costs to this bid-ask spread. By knowing how many pips are in the spread, you are able to calculate your costs for the trade, exclusive of any other factors such as slippage, commissions, or rollover costs.

Only ECNs typically charge commissions and, therefore, their bid-ask spreads are tighter. Bid-ask spreads typically range from 0 pips to 10 pips in most pairs but can balloon much higher during fast markets and slow markets, as well as before, during, and after news releases. The information in Table below is given for the purpose of calculating the dollar value of the bid-ask spread and, if you trade with a market maker, the majority of your cost to trade that currency pair.

[caption id="attachment_12972" align="aligncenter" width="561"]The Bid-Ask Spread The Bid-Ask Spread[/caption]

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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