Understanding a Quote: Bid, Ask and Spread

Open any trading instrument and the screen shows two prices, not one. Understanding these prices and the distance between them is the starting point for every trade. They determine your execution price, how far the market must move before you break even, and what the trade actually costs.

1. Two Prices: Bid and Ask

Quotes are usually shown as bid/ask. Consider this illustrative quote:

1. Bid: the price at which you sell, including when you close a buy position. It represents the highest price buyers are currently willing to pay
2. Ask, also called Offer: the price at which you buy, including when you close a sell position. It represents the lowest price sellers are currently willing to accept

A simple way to remember this is to buy at the higher price and sell at the lower price. Currency exchange counters at airports and banks work in the same way: they display two prices for the same currency. The price you pay to buy foreign currency is higher than the price you receive when selling it back. The difference is the counter's income.

Both prices change in real time, and the trading platform's quote window displays them together.

2. Spread: The Distance Between the Two Prices

Spread = Ask − Bid.

In the example above, 1.08520 − 1.08500 = 0.00020. For EUR/USD, 1 pip is 0.0001, the fourth decimal place, so the spread is 2 pips.

For yen pairs, a pip is the second decimal place. If USD/JPY is quoted at 150.20/150.23, the spread is 0.03, or 3 pips. For the definition of a pip, see “Pips, Pip Value and Lots: Calculating a Trade's Profit or Loss”.

Why is the spread a cost? Suppose you buy at the ask of 1.08520 and immediately close the position. You must close at the bid of 1.08500, leaving an immediate loss of 2 pips. In other words:

Every new position starts one spread behind. The market must first move that distance in your favour before you break even.

Continuing the example, suppose the bid rises from 1.08500 to 1.08540 after you buy, a rise of 4 pips. Your entry price was the ask of 1.08520, so your actual profit is only 2 pips. With a narrower spread, the same market move takes you into profit sooner.

3. Converting the Spread into Money

Pip figures alone can be hard to visualise. The monetary cost of the spread is calculated as follows:

Spread cost = Spread in pips × Pip value per lot × Number of lots

In forex, 1 standard lot is 100,000 units of the base currency. For a pair quoted in US dollars, such as EUR/USD, the pip value of 1 standard lot is 100,000 × 0.0001 = USD 10:

This cost is incurred as soon as the position opens, whether the trade eventually wins or loses. The more frequently you trade, the faster spread costs accumulate.

The spread can also be expressed as a percentage to help compare different instruments:

Spread percentage = (Ask − Bid) ÷ Ask × 100%

Example: (1.08520 − 1.08500) ÷ 1.08520 × 100% ≈ 0.018%.

4. Why Spreads Widen and Narrow

Spreads do not change at random. They provide a real-time reading of market liquidity.

1. Liquidity is the main factor. More participants and more densely placed orders bring bids and offers closer together, narrowing the spread. Major currency pairs generally have the best liquidity during the overlap between the London and New York sessions
2. Spreads widen around major news. Around high-impact releases such as non-farm payrolls or central bank rate decisions, prices can move sharply within seconds. Quote providers withdraw orders, liquidity thins and spreads can expand rapidly
3. The time of day matters. Although forex operates 24 hours a day from Monday to Friday, liquidity varies. Spreads are often wider around the daily rollover near the New York close, on holidays and during quiet overnight periods
4. Spreads differ by instrument. Major currency pairs are the most actively traded and tend to have the narrowest spreads. Crosses and emerging-market pairs trade less actively and have wider spreads. Gold, oil, stock indices and cryptocurrencies each have their own quoting conventions and usual spread ranges
5. Account type and pricing structure also matter. Consider MIN, STP and ECN accounts:
6. MIN account: a lower entry deposit requirement, with trading costs included in the spread and no separate commission, suited to starting with a small amount of capital
7. STP account (Straight Through Processing): orders are passed directly to liquidity providers, spreads float with the market, and generally no separate commission is charged
8. ECN account (Electronic Communication Network): direct access to market quotes, spreads closest to raw pricing and a separate commission per lot, suited to frequent, cost-sensitive traders

Forex is also an over-the-counter market with no single exchange. Different quote providers may show slightly different prices at the same moment. When comparing trading costs, look at actual quotes rather than only the advertised “minimum spread”.

5. Fixed and Floating Spreads

Neither approach is universally better. Fixed spreads offer stability, while floating spreads track market conditions more closely. When trading with floating spreads, make a habit of checking the economic calendar.

6. Practical Essentials: Which Price Triggers Stops and Targets?

This is one of the most useful points in the lesson, and one of the easiest to overlook.

Opening and closing a position use different prices:

Example 1: a sell position. You sell EUR/USD at the bid of 1.08500, with a stop-loss at 1.08600 and take-profit at 1.08300. A sell position closes at the ask, so:

1. The stop-loss triggers when the ask rises to 1.08600. If the spread is 2 pips, the bid shown on the chart may only be 1.08580, making it look as though the stop line has not been reached
2. Take-profit triggers when the ask falls to 1.08300. The bid will then be around 1.08280, so the chart must move one spread beyond your take-profit line

Example 2: a buy position. You buy at the ask of 1.08520, with take-profit at 1.08720 and a stop-loss at 1.08420. A buy position closes at the bid, so both orders depend on the bid reaching their respective levels.

Why do beginners sometimes see apparently unexplained stop-outs? Most trading platforms draw candlestick charts using bid prices by default. A short position's stop-loss is triggered by the ask, which is not shown on that chart. When spreads widen around news, the ask may reach the stop while the bid candle remains several pips away.

Two practical steps:

1. Enable the Ask line in the chart settings so that both prices are visible
2. Allow for the current spread when setting stop-loss and take-profit levels, rather than placing them directly against key price levels

7. The Spread as a Share of Your Profit Target

The same 3-pip spread means very different things for different trading styles:

The smaller the target, the larger the share consumed by the spread. For frequent short-term trades, a few pips may determine whether an opportunity is worthwhile. For longer-held trades, the spread is a smaller proportion of the target, although overnight financing must also be considered, as discussed in later lessons.

A practical approach is to set a maximum acceptable spread for the instruments you trade regularly. Check the spread before entering. If it exceeds your limit, wait for quotes to return to normal before opening a new position.

The spread itself also signals market conditions. A sudden, substantial widening often indicates stress from major news, an unexpected risk event or thin liquidity. Waiting is often the more disciplined choice at such times.

Summary

1. Every quote has two prices: buy at the ask and sell at the bid. The difference is the spread
2. The spread is a cost incurred on entry. A new position must move one spread in your favour to break even
3. Spread cost = Spread × Pip value per lot × Lots. The smaller the target, the larger the spread's share
4. Liquidity determines how wide spreads are. Pay particular attention around news, during quiet periods and in less actively traded instruments
5. Buy positions close at the bid; sell positions close at the ask. Display the Ask line and allow room for the spread when setting stops

For more on pips, pip value and lots, see “Pips, Pip Value and Lots: Calculating a Trade's Profit or Loss”.

Risk warning: CFDs are leveraged products. Price movements may cause losses greater than expected, and CFDs are not suitable for all investors. This lesson is for educational purposes only and does not constitute investment advice. All numerical examples illustrate calculation methods only. Actual trading conditions are subject to the platform's published terms.