The bid-ask spread

Every price you see in forex is really two prices, not one. There is a price at which you can sell and a slightly different, higher price at which you can buy, and the gap between them is one of the most common costs of trading. Once you can read both numbers, you understand why a new position often starts a little in the red.

Two prices in every quote

Open any trading platform and a pair like EUR/USD shows two numbers side by side. The lower number is the bid, the price at which the market will buy the pair from you, so it is the price you sell at. The higher number is the ask, sometimes called the offer, and it is the price you buy at.

• Bid The price you can sell at. It is the lower of the two prices in the quote.
• Ask (or offer) The price you can buy at. It is the higher of the two prices in the quote.

The spread is a core cost of trading

The spread is simply the gap between the bid and the ask. Because you enter by buying at the higher ask but would close by selling at the lower bid, a new position shows a small loss the instant it opens, equal to the spread. As an illustration, suppose EUR/USD is quoted 1.0850 bid and 1.0851 ask: the spread is one pip, and the price would need to move at least that far in your favour before the position reaches breakeven.

Pips, liquidity, and spread types

Spreads are measured in pips, the standard small unit of price movement, which is the fourth decimal place for most pairs and the second decimal place for pairs that include the Japanese yen. Heavily traded pairs such as EUR/USD tend to have tighter spreads because there are many buyers and sellers, while less liquid pairs are usually wider. Spreads can also be variable, moving with market conditions, or fixed, held at a set level by the broker; variable spreads often widen around major news or during quiet periods.