Bid/Ask Spread
Like in the securities markets, the forex markets have a bid price (the price at which a broker is willing to buy the base currency) and an ask price (the price at which a broker is willing to sell the base currency). When you enter into a forex transaction you buy at the ask and you sell at the bid. The difference between the bid price and the ask price is the spread. Spreads are usually quoted in pips.
→ EXAMPLE:
EUR/USD = 1.2345/1.2349
Bid= 1.2345; Ask = 1.2349; Spread = 0.0004 (4 pips)
May also be quoted in the following manner:
EUR/USD = 1.2345/49 /USD = 45/49
→ Why does bid/ask spread matter?
The spread matters because this effectively indicates how much a currency pair must move before the position becomes profitable for the trader. If there is a large spread then the currency pair will need to move further in order to make a profit. It the spread is small (as in many of the “major” currencies) then the movement needed for a position to become profitable is much smaller.
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