What are the Bid and the Ask prices?

When currency pairs are quoted for trade they will be followed by two numbers under the heading of Bid (also known as Sell) and Ask (also known as Offer or Buy).

The following is an example of a typical trading table:

Instrument Bid Ask
EUR/USD 1.3428 1.3431
USD/JPY 123.40 123.43
GBP/USD 1.9926 1.9930
USD/CHF 1.2375 1.2379
EUR/JPY 165.70 165.74
EUR/GBP 0.6737 0.6740
AUD/USD 0.8468 0.8472
USD/CAD 1.0655 1.0660
EUR/CHF 1.6620 1.6624
GBP/JPY 245.89 245.99

When trading, it is a general standard that all trades are traded in the nominal value of the major currency.

For example, if someone were to wish to trade in EUR/USD an amount of 100,000, that amount would be in EUR and not in USD.

For instance, the terminology would be to either to Sell 100,000 EUR against the USD at the Bid Price or Buy 100,000 EUR against the USD at the Ask price.

The number represents how much of the secondary currency one needs in order to exchange it to one unit of the major currency.

All the numbers represent the value of the major currency in terms of the secondary currency. If looking at the EUR/USD Ask price for example the number 1.3431 means that you need $1 and 34.31 cents in order to buy 1 Euro. How do I Trade?

In the case of EUR/USD the Bid price is shown as 1.3428 and the Ask price as 1.3431. As explained above in order to trade one must trade in an amount of the major currency.

As above let’s say one wishes to trade in an amount of 100,000 Euro against the US Dollar.

Example 1

Sell 100,000 EUR against the USD.

As explained above since the numbers represent the value of the major currency in terms of the secondary currency, it makes sense that when one wishes to sell the major currency they would be doing so at the smaller number (the Bid), and so in this case the Bid or at a price of 1.3428.

In monetary terms this would mean that the client sold 100,000 EUR and bought (100,000*1.3428=) 134,280 USD.

The client’s balance sheet would look as follows:

Balance in Euro’s Balance in US Dollars
-100,000 +134,280

Since the client is now short EUR (Sold EUR) and long USD (Bought USD), in order to close the trade and therefore either make a profit or loss, he will have to trade the exact opposite trade in the future.

Example 2

Buy 100,000 EUR against the USD

As explained above since the numbers represent the value of the major currency in terms of the secondary currency, it makes sense that when one wishes to buy the major currency they would be doing so at the larger number (the Ask), and so in this case the Ask or at a price of 1.3431.

In monetary terms this would mean that the client bought 100,000 EUR and sold (100,000*1.3431=) 134,310 USD.

The client’s balance sheet would look as follows:

Balance in Euro’s Balance in US Dollars
+100,000 -134,310

Since the client is now long EUR (Bought EUR) and short USD (Sold USD), in order to close the trade and therefore either make a profit or loss, he will have to trade the exact opposite trade in the future.
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How can I Profit from Trading?

The decision on whether to buy or sell a currency, in what amount, at what rate and so on is made by different people for many different reasons and they will be discussed in later pages. (Refer to Trading Tips, Technical and Fundamental Analysis)

For the moment let’s discuss the pure technical methods of how to enter a trade, close a trade and calculate the profit and loss.

As explained above, one can either buy or sell any currency against any other currency that is offered by the broker for trade. The trade is always performed in an amount of the major currency. The decision now is whether to buy or sell the major currency and against which currency should one transact the trade.

Lets say that a client has believes that the Euro is going to strengthen against the USD and the client wishes to trade in 100,000 as in the example above.

As discussed above the client will Buy 100,000 EUR against the USD at the larger number (the Ask), a price of 1.3431.

As calculated previously, this would mean that the client bought 100,000 EUR and sold (100,000*1.3431=) 134,310 USD.

The client’s balance sheet would look as follows:

Balance in Euro’s Balance in US Dollars
+100,000 -134,310

Since the client bought the EUR, he is hoping that the price of the EUR relative to the USD will rise (or strengthen) until such time as he will be able to sell the EUR back to the broker and make a profit.

Since the client bought the Euro against the US Dollar at a price of 1.3431, and that we know that when it comes time to sell the EUR he will have to do so at the Bid price (the smaller number), then the market must move in his favor by at list one point or pip above his purchase price (see discussions on pips and spreads below).

For example, let’s say that the market has moved by 0.2 percent in favor of the client.

(0.2/100*1.3431=) 27 points or pips; the price quoted by the broker for EUR/USD will now look like this:

Instrument Bid Ask
EUR/USD 1.3455 1.3458

As we can see both the Bid and the Ask price have moved up by 0.0027 or 27 points or pips. As discussed, in order to close the initial trade the client must now sell the 100,000 EUR against the USD at the Bid price of 1.3455.

As calculated previously, this would mean that the client sold 100,000 EUR and bought (100,000*1.3455=) 134,550 USD. The client’s balance sheet will now look like:

Balance in Euro’s Balance in US Dollars
+100,000 -134,310 (Bought EUR/USD at 1.3431)
-100,000 +134,550 (Sold EUR/USD at 1.3455)
0 +240

As can be seen the client has made a profit of 240 US Dollars. His balance in Euro’s is zero.

Since the client bought 100,000 EUR and then sold 100,000 EUR his balance in EUR will always be zero, no matter if he made a profit or loss in the transaction. The profit or loss will always appear in the secondary currency in this case the USD.

From this we can see, that since all trades are performed in monetary amounts in the major currency, the balance at the end of closing the trade in the major currency will always be zero, however the balance in the secondary currency will show the profit or loss.

At Forex Place in order to make the calculation seamless we immediately exchange all profits and losses into USD, so as to make the calculation as easy as possible for the trader, however it is important to know how profits and losses are calculated as displayed above.