The forex market does not sleep. With over 7 trillion dollars traded daily across the globe in the forex market, you can trade 24-hours per day, by either placing trades or monitoring activity. Traders around the world connect every second from Tokyo to New York.
The forex supply/demand market is a platform to offer currency for sale or for purchase at any given time. However, what a lot of traders do not do is understand how pricing of currency works, every day it can mean success or failure as a trader.
An exchange rate consists of two prices: the bid price and the ask price. The bid price is what buyers are willing to pay for currency. The ask price is what sellers want for the currency. You can think about when you buy something at a flea market. If you are willing to pay $20 for the item (your bid), the seller wants $25 (the ask price). This difference between your bid and their ask price is what affects every independent trade transaction every time you trade.
What is the ask price
The ask price is the lowest price at which currency sellers are willing to sell. When you want to buy EUR/USD, you pay the ask price, not the bid price. It's as simple as that. However, many traders become confused about which price is relevant for them.
Let me give you an example. Say EUR/USD is quoting at 1.1000/1.1002. In this example, the first number (1.1000) is the bid price and the second number (1.1002) is the ask price. When you click "buy," you will be charged 1.1002 for each euro you buy. The bid/ask spread (in this example 2 pips) is your trading cost and the market maker's profit.
Why Ask Price Matters in Order to Achieve Trading Success
Ask price, is more than just a price on your screen – it is the basis for every trading decision you make. If you understand how ask price works, only then are you able to have a better understanding of controlling your costs, timing your trades, and managing risk.
Your costs of trading start with the ask price. For example, you are buying one standard lot of EUR/USD at an ask price of 1.1002. You are buying 100,000 euros for $1.1002 each, which totals $110,020. If the bid is 1.1000 when you enter, then the bid will have to go to at least 1.1002 in order for you to break-even when the spread is taken into consideration.
How to Calculate Ask Price Impacts to Your Trades
Now, lets run through a real example. You want to buy 50,000 units of USD/JPY and the current quote is 149.50/149.52. Your immediate costs are 149.52 yen per dollar for 50,000 units, which totals 7,476,000 yen. Then the spread costs were (149.52 - 149.50) x 50,000 = 1,000 yen.
When dealing with cross-currencies or accounts in other currencies, the math increases in complexity. If you trade EUR/GBP from USD accounts, the conversion impact means you will also need to go back to USD on the spread cost using the most current exchange rates.
Ask Price Know-How in today's market
Clever traders will always find ways of using ask price data to time their trades and increase profitability. The trick is using ask prices to determine when conditions might allow for favorable pricing, and timing your trades according to the ask price opportunity.
Ask prices can also be gapped substantially, while a major economic announcement could be made. Imagine that the Federal Reserve has announced a surprise increase (hike) in interest rates. EUR/USD was at 1.0500/1.0502 prior to the announcement, and quickly gaps down to 1.0480/1.0485. If you had a BUY order for the pending price at 1.0502, you would get a fill down at 1.0485, which is 17-pips away from your expected buy price.
How Market Forces Take Shape with the Ask Price
As you can see, ask price is not standalone and is always influenced by marketplace liquidity, order flow, and economic circumstances. Understanding these forces and market dynamics will allow you to do your very best to anticipate price movements and take solid trading positions.
Market makers are a major component of the formation of an ask price. These are organizations that constantly provide bid and ask quotes and make their money off of the spread. If the market environment is normal, the market makers should be able to offer you a narrow spread. If the environment is stressful, your ask price may widen as the market participants are trying to hedge against possible fast moves in price.
Trading Strategies Based on Ask Price Behavior
Professional traders themselves have created strategies to take advantage of ask prices. When used properly, following some ask price behaviors can improve your entry when trading, and save you money in trading costs overall.
The strategy called “spread scalping” takes advantage of currency pairs that usually have tight spreads. When trading this strategy, you want a pair that usually has a tight spread, and then to monitor the ask price for periods of temporarily widening of spreads to enter your position when the spread returns to normal.
Working with Historical Ask Price Analytics
Utilizing historical ask price analytics to study ask price behaviours is a fundamental way to develop your trading. The more you study the behaviour of price, the more you will be able to anticipate future ask price behaviour and determine the best timing for an entry to get the most favourable ask price.
Patterns of seasonal ask price tend to repeat with wonderful regularity. For example, EUR/USD ask prices tend to be more volatile during European Central Bank meeting weeks. On the other hand, USD/JPY ask prices tended to be spiking when the Bank of Japan was intervening. When you track these patterns you can plan for these predictable ask price shifts.
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