Traders usually buy and sell currencies at different prices. And it makes sense, since they buy from different sellers and sell to different buyers. These different prices are called Bid and Ask prices. Observing the Bid and the Ask numbers can give traders valuable information.
Bid definition
Bid is a price at which a trader sells a currency pair.
Why is understanding the Bid important for traders?
- Bid and Ask prices create spreads. Understanding how they work can save you trading fees.
- Rising distance between the Bid and the Ask prices might indicate low liquidity and high volatility.
Thorough Bid Explanation
In the markets prices are created by limit and market orders. When a trader places a limit order, he or she only buys or sells a currency pair from a predetermined level. The obvious downside of the limit order is that the price might not reach this level and the order will not get filled.
Another type of order is called market order. When a trader places a market order, the order gets filled instantly with the current price.
Bid prices are created by limit orders. They represent the offerings from the buyers. And the same way, Ask prices represent the offerings (limit orders) from the sellers. The difference between the Bid and the Ask prices are called spreads. To minimize the spreads, traders place orders in highly liquid markets.
Example of Bid in Forex
In Forex Ask and Bid prices are closest when trading Major currency pairs. Major currencies are traded by most of the traders and as a result there are lots of limit orders in the market. The highest Bid prices are automatically offered by trading platforms when you are placing orders.
When spreads are increasing, this can indicate that the activity in the markets is decreasing and liquidity falls. Novice traders avoid non mejor pairs and low liquidity trading to save fees on spreads.
The EUR/USD pair is the most liquid one in the market. When brokers have a large number of liquidity providers and don’t charge traders with spread markups, Bid and Ask prices might become the same number. Therefore, the spreads can get as low as 0.
FAQs on Bid in Trading
What is an example of a bid?
Let’s say you have decided to short EUR/USD, the price you sell the pair is called a bid price. Similarly, when you decide to buy a pair, you pay the Ask price.
Why is bid important?
Bid price together with the ask price create the market price. Every time you place a buy limit order, you participate in creation of the Bid price.
Can bid and ask price be the same?
Yes, in highly liquid pairs, when brokers do not charge traders with spreads, the Ask and the Bid prices can become the same, offering 0 spreads. However, the market conditions are dynamic and even most liquid markets experience market spreads.