Forex trading is simply buying and selling currencies. For each trade, there will always be two prices: the bid price and lifestyle price or ask price. The bid price is the amount a trader will receive when selling a position. It is essential to understand the bid price in order to be a successful trader.
Why is there a selling price and a buying price? To make money! Brokers need to do exactly that, make money. Brokers will buy the currency for one price and sell it to you for a higher price. The difference between the two amounts would be called the spread.
Think of it in terms of selling your used phone. If a buyer offers you $400 (the bid price), but you want $450 (the ask price), then the $50 difference between those two amounts would be like the forex spread. Professional traders know this concept very well. When they are day trading EUR/USD and they see a bid price of 1.1000, they know exactly what they should receive when they close their position.
What is Bid Price
The bid price is always the highest price a buyer is willing to offer for a currency pair. Because when you close or sell a position, you will receive the bid price. The bid price is constantly changing throughout the trading day.
The spread is the difference between the bid and ask price. In the case of EUR/USD, if the bid is 1.1000 and the ask is 1.1003, the spread is three pips. A pip is the smallest unit of price movement in forex trading and is usually the fourth decimal place of a currency pair for the major currency pairs.
The Evolution of Bid Prices
In the traditional forex marketplace, the spread was often a lot larger than they are today. Banks traditionally traded currencies among themselves, with spreads of 5-10 pips or more. And for retail traders, the costs would have been even larger just to access the marketplace.
Online brokerage firms have changed everything. They brought into existence a whole new entity called electronic trading platforms, where retail traders could trade directly with liquidity providers – improving bid-ask spreads dramatically.
Technology has continued to refine how traders access markets. ECN platforms have started to offer raw spreads with low mark up. Today some brokers allow zero-spread trading accounts, that there will just be a commission as opposed to spreading the price, bid or ask.
Types of Spreads and Bid Prices
Fixed spreads are as a mechanism that to novices (fx participants) will enable a predictability price trading cost. This account mechanism will provide the trader with consistent bid pricing, thus allowing for a predictable understanding of the potential losses and profit.
Variable spreads are spreads that will change according to the market price action in the foreign exchange market, hence force majeure and volatility of, a strong news event, or liquidity, will widen the bid price. The increase in buying/selling costs i.e. increase in bid prices will make it unfavourable for you - and your trades.
Utilizing Bid Price in Technical Analysis
Bid prices are the foundational element of the candlestick charts reported to you in your platform. The candlestick shows the time of the open, close, high, and low bid price. While the other elements of technical analysis were hypothetical, the cumulative records show individual transactions that produced patterns. These patterns provide perspective to analyze and help become aware of trends and opportunities for trade.
Support and resistance levels are commonly found at identifiable bid levels. When the bid price bounces at a level multiple times, the level will become a support zone. A break below that level may signal further downside potential.
Market Psychology of Bid Price
Bid prices are also market participants' overall psychology. When hedge funds are fearful, the bid price falls, because more sellers want to sell. When hedge funds are greedy, the bid price rises, because more traders want to buy.
Incredibly, bid prices can be greatly affected by huge institutional traders. Hedge funds can help move bid prices based on the size of their orders or if they put in a billion-dollar sell order, the brokers have to adjust the bid price down to accommodate all initial sell orders, due to the increased supply of sell orders.
Real-Life Trading Instances
Sarah was a newcomer to trading with ants. She never really accounted for spread costs in her past trades; she had executed approximately 50 trades that month and was paying the 2-3 pip costs each time. Even with the 60% win rate for that month, she lost money because she was unaware of how large and simple costs like spreads would eat into her profits.
Michael was a consistent trader that at some point changed his opening from a standard account to an ECN account. His average spread went from 1.8 pips to 0.3 pips. After this process, he was able to increase his monthly returns by an extra 2.5% for the same trading strategy.
Final Thoughts
Understanding bid price is one of the fundamental notions of forex trading, and any trader who wishes to be successful needs to have a good grasp of how bid prices function and how customer bid price affects their profit.
The spread that exists between bid and ask prices topped up with the transaction cost is a hidden cost to every trade. When it comes to the cost of trading, for active traders that cost multiplies and makes the effective cost of trading much more than just the spread and trading commissions or fees.
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