Every trade starts at a loss. The spread guarantees it. While beginners think they enter at "the price," professionals know there are two prices: the Bid (what you get when selling) and the Ask (what you pay when buying). The gap between them is the spread—your instant cost. Understanding this two-price system is the difference between precise execution and confused losses.
Welcome to Lesson 12
You've mastered Lot Sizes, Pips, Spreads, and Trading Costs. You understand the mathematics. But here's the reality check:
Understanding costs means nothing if you don't know where those costs come from: the Bid/Ask spread.
Imagine this scenario:
You want to buy EUR/USD. You see the price: 1.0850. You click "Buy." You enter at 1.0850. Perfect.
You look at your open position: Entry shows 1.0852. You think: "Wait, I bought at 1.0850. Why does it say 1.0852?"
The Reality: The "price" you saw (1.0850) was the Bid price (for selling). The Ask price (for buying) was 1.0852. You bought at the Ask. The 2-pip difference is the spread—your instant cost.
Immediately after entry: Your position shows -$20 unrealized loss (2 pips × $10/pip = $20 with 1.00 lot).
You panic: "I'm already losing money and price hasn't moved!"
What happened: You didn't understand Bid/Ask. You thought you were entering at 1.0850, but that was the Bid (selling price). To buy, you paid the Ask (1.0852). This 2-pip spread is why every trade starts negative. You need price to move 2 pips in your favor just to break even.
The Professional Difference: Retail traders don't understand why they're "immediately red" after entering. Professional traders know every trade starts at a small loss equal to the spread. They account for this in their calculations, ensure spreads are tight during high-liquidity sessions, and avoid wide-spread pairs. They see the spread as a business cost, not a surprise.
Lesson Chapters
1Chapter 1: Anatomy of a Forex Quote⏱️ ~2 min
Before understanding Bid/Ask, you must understand the structure of a currency pair.
The Two-Currency System
Every forex quote involves two currencies in a specific order:
Base Currency (First Currency):
- The asset you are buying or selling
- Always equals 1 unit
- The "product" being traded
Quote Currency (Second Currency):
- The currency used to express the value
- Shows the price of 1 unit of Base
- The "payment currency"
Quote Structure
EUR/USD = 1.0850
Translation:
- EUR = Base Currency (what you're trading)
- USD = Quote Currency (what you're paying with)
- 1.0850 = The exchange rate
In Plain English: "1 Euro costs 1.0850 US Dollars"
The Trading Implication
When you BUY EUR/USD:
- You buy EUR (Base Currency)
- You sell USD (Quote Currency)
- You believe EUR will strengthen vs. USD
When you SELL EUR/USD:
- You sell EUR (Base Currency)
- You buy USD (Quote Currency)
- You believe USD will strengthen vs. EUR
Professional Rule: Before every trade, verbalize what you're doing: "I'm buying EUR/USD, which means I'm buying Euros and selling Dollars." This prevents execution errors where you click the wrong button or trade the wrong pair for your directional bias.
2Chapter 2: The Bid Price - The Selling Side⏱️ ~2 min
The Bid Price is the price at which the broker (or market maker/liquidity provider) is willing to buy the Base Currency from you.
The Mechanism
Your Perspective: You want to SELL the Base Currency
Broker's Perspective: The broker will BUY from you at the Bid
The Price: Always the lower of the two quoted prices
Visual Example
EUR/USD Quote:
Bid: 1.0850 | Ask: 1.0852
If you click "SELL":
- You sell 1 EUR for $1.0850
- Broker buys 1 EUR from you at $1.0850
- Your execution price: 1.0850 (the Bid)
Bid Price Characteristics
Always Lower:
- Bid is always less than Ask
- This is how brokers make money (the spread)
Displayed on Charts:
- Most platforms show Bid price as the main line
- This is the "market price" you see
- Ask line is often hidden (but can be enabled)
Used for:
- Executing SELL market orders
- Closing BUY positions (you sell back to broker)
- Triggering Sell Stop orders
- Triggering Buy Limit orders
The Supply Side: Bid represents where supply (selling pressure) meets the market.
3Chapter 3: The Ask Price - The Buying Side⏱️ ~2 min
The Ask Price (sometimes called the Offer Price) is the price at which the broker is willing to sell the Base Currency to you.
The Mechanism
Your Perspective: You want to BUY the Base Currency
Broker's Perspective: The broker will SELL to you at the Ask
The Price: Always the higher of the two quoted prices
Visual Example
EUR/USD Quote:
Bid: 1.0850 | Ask: 1.0852
If you click "BUY":
- You buy 1 EUR for $1.0852
- Broker sells 1 EUR to you at $1.0852
- Your execution price: 1.0852 (the Ask)
Ask Price Characteristics
Always Higher:
- Ask is always more than Bid
- The difference is the broker's profit (spread)
Not Usually Displayed:
- Most charts show only Bid price
- Ask line can be enabled in settings
- Sits 1-3 pips above Bid line
Used for:
- Executing BUY market orders
- Closing SELL positions (you buy back from broker)
- Triggering Buy Stop orders
- Triggering Sell Limit orders
The Demand Side: Ask represents where demand (buying pressure) meets the market.
4Chapter 4: The Spread - Cost of Execution⏱️ ~3 min
The fundamental reason Bid and Ask prices are different is the Spread—the built-in transaction cost brokers charge to execute your trade.
The Spread Formula
Spread (pips) = Ask Price - Bid Price
Spread Calculation Examples
Example 1: EUR/USD
Bid: 1.0850 | Ask: 1.0852
Spread = 1.0852 - 1.0850 = 0.0002 = 2 pips
Example 2: GBP/USD
Bid: 1.2500 | Ask: 1.2503
Spread = 1.2503 - 1.2500 = 0.0003 = 3 pips
Example 3: USD/JPY
Bid: 145.25 | Ask: 145.28
Spread = 145.28 - 145.25 = 0.03 = 3 pips
Why You Start at a Loss
The Brutal Reality:
When you BUY:
- Entry price: Ask (1.0852)
- Current market: Bid (1.0850)
- Immediate loss: 2 pips (the spread)
- Need price to rise 2 pips just to break even
When you SELL:
- Entry price: Bid (1.0850)
- To close (buy back): Ask (1.0852)
- Immediate loss: 2 pips (the spread)
- Need price to fall 2 pips just to break even
Example with Real Money (1.00 lot):
BUY EUR/USD:
- Entry: 1.0852 (Ask)
- Immediately after: Bid still at 1.0850
- Unrealized P/L: -$20 (2 pips × $10/pip)
- Break-even requires Bid to reach 1.0852 (Ask would be 1.0854)
This is why the spread is a COST, not just a number.
Spread Impact on Strategies
Scalpers (5-15 pip targets):
- Critical: Must have tight spreads (0.5-1.5 pips)
- Wide spread (5 pips) destroys profitability
- Prefer ECN accounts, major pairs, high-liquidity sessions
Day Traders (20-50 pip targets):
- Important: Prefer 1-3 pip spreads
- Wide spreads reduce profit potential
- Avoid exotic pairs
Swing Traders (100-300 pip targets):
- Less critical: 2-5 pip spread acceptable
- Targets are large enough to absorb spread cost
- Can trade during various sessions
Position Traders (500+ pip targets):
- Minimal concern: Even 10-pip spread is negligible
- Focus on execution quality over spread
5Chapter 5: How Bid/Ask Affects Order Execution⏱️ ~3 min
Understanding Bid and Ask is critical for every aspect of trade execution, particularly when using different order types.
A. Market Orders (Immediate Execution)
Market Orders execute instantly at the best available price.
BUY Market Order:
- Executes at Ask Price (you pay the higher price)
- Example: Ask at 1.0852 → You buy at 1.0852
SELL Market Order:
- Executes at Bid Price (you receive the lower price)
- Example: Bid at 1.0850 → You sell at 1.0850
Why This Matters:
- You always get the worse price (that's the spread cost)
- Broker always gets the better price (that's their profit)
- This is the cost of instant liquidity
B. Pending Orders (Future Execution)
Pending orders (Limit, Stop) must be set relative to the correct price line.
Order Type Reference Table:
| Order Type | Action | Price Used | Placement | Purpose |
|---|---|---|---|---|
| Buy Limit | Buy | Bid | Below current Bid | Buy at lower price (pullback) |
| Buy Stop | Buy | Ask | Above current Ask | Buy on breakout |
| Sell Limit | Sell | Ask | Above current Ask | Sell at higher price (rally) |
| Sell Stop | Sell | Bid | Below current Bid | Sell on breakdown |
Pending Order Examples
Buy Limit Example:
Current Quote: Bid 1.0850 / Ask 1.0852
Your Order: Buy Limit at 1.0840
Trigger: When Bid price drops to 1.0840
- At that moment, Ask would be ~1.0842
- Your order executes at Ask: 1.0842
Sell Limit Example:
Current Quote: Bid 1.0850 / Ask 1.0852
Your Order: Sell Limit at 1.0870
Trigger: When Ask price rises to 1.0870
- At that moment, Bid would be ~1.0868
- Your order executes at Bid: 1.0868
Common Beginner Mistakes
Mistake 1: Using Wrong Price for Limits
- Sets Buy Limit based on Ask price (wrong)
- Should use Bid price for Buy Limit trigger
- Order never fills or fills at wrong level
Mistake 2: Not Accounting for Spread
- Sees support at 1.0800 on chart (Bid line)
- Places Buy Limit at exactly 1.0800
- Forgets Ask is 2 pips higher (1.0802)
- Actually buying at 1.0802, not 1.0800
Professional Solution: Always show both Bid and Ask lines on your chart. Set pending orders accounting for spread width.
6Chapter 6: Summary, FAQs & Quiz⏱️ ~3 min
Summary
The forex quote consists of two prices: the Bid Price (price for selling the Base Currency) and the Ask Price (price for buying the Base Currency).
Key Principles (0/4)
Professional Understanding: The spread is the cost of instant liquidity. You pay it every time you enter a trade. Minimize this cost by trading major pairs during high-liquidity sessions (London/NY overlap) and avoiding news periods when spreads widen dramatically.
Frequently Asked Questions (FAQ)
Q1: Why do brokers always quote Bid/Ask prices, not just one price?
Brokers must quote two prices because they act as intermediaries (market makers or aggregating liquidity providers). They must simultaneously offer you:
- A price to sell at (Bid) - they're willing to buy from you
- A price to buy at (Ask) - they're willing to sell to you
The small difference (spread) is how they generate revenue and compensate for providing instant liquidity 24/5. This two-price system is how ALL markets work (stocks, futures, commodities).
Q2: Does the spread change during the day?
Yes, the spread is dynamic (except on fixed-spread accounts).
Variable Spread Behavior:
Tight Spreads (0.5-1.5 pips):
- London session (3 AM - 12 PM EST)
- New York session (8 AM - 5 PM EST)
- Overlap (8 AM - 12 PM EST): Tightest spreads
- High liquidity = tight spreads
Wide Spreads (2-5 pips):
- Asian session (low liquidity)
- Sundays (market opening)
- Late Friday (market closing)
- Holidays
Extremely Wide Spreads (10-50 pips):
- Major news releases (NFP, CPI, Fed)
- First 15-30 minutes after news
- Flash crashes or black swan events
Professional Strategy: Only trade during tight-spread periods (London/NY overlap) unless you're swing trading with large targets.
Quiz
If you place a Sell Market Order on the EUR/USD pair, your order will be executed at the:
The difference between the Bid Price and the Ask Price is known as the:
In the quote USD/JPY = 145.25 / 145.28, what is the cost of the spread in pips?
Why must a trader pay close attention to the Ask Price when setting a Buy Stop order?
If you buy EUR/USD at Ask 1.0852 with a 1.00 Standard Lot, and the Bid is currently 1.0850, your immediate unrealized P/L is:
Call to Action
You now possess the foundational knowledge of how price is presented and executed in the forex market.
Action Item: Open your Demo Trading Account and ensure your platform is set to display both the Bid and Ask lines on your chart (Settings → Chart → Show Ask Line). Observe how these two lines separate and converge, especially during the low-liquidity Asian session versus the high-volatility London-New York overlap.
See the Bid/Ask in Action
Practice reading Bid/Ask quotes on a demo account. Enable the Ask line on your charts, execute market orders, and observe how the spread affects your immediate P/L. Build awareness of this transaction cost before it costs real money.
Deriv
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Proceed to Lesson 13: Understanding Leverage, Margin & Effective Leverage
Prerequisites
Before studying this lesson, ensure you've mastered these foundational concepts:
Ready to master the two-price system? Understanding Bid/Ask is essential for precise order execution and professional trading success.
Ready to continue?
Mark this lesson as complete to track your progress.