Have you ever had an open trade that has been stopped out before price actually reached your stop loss level. How about this one, you set up a pending buy order at a key price level, the market does reach your price level on the chart but the trade never gets triggered. What you are failing to do is factor in the market spread into your trade levels.
A professional trader must always account for the spread otherwise you will experience these inconsistencies with trades not triggering or stops being triggered before they were hit. In this article we are going discuss the difference between the BID and ASK price, cover what the market spread is and explain how you should factor in the spread to your trade levels to stop these mishaps. It is crucial as a professional trader that you understand the difference between the BID and ASK prices, failing to do so will mean you will no doubt make potentially costly mistakes when setting up your trades.
Every time you place a trade these two price quotes come into play. The BID price is something that you will be very familiar with. The BID price may 1. This is where calculated Forex spread comes into play. Forex brokers are businesses; they provide a service with the objective of turning over a profit.
So where are these profits coming from? Brokers LOVE high frequency traders which place lots of trades every day, because each of these transactions generates the broker profit, regardless whether the trader loses or wins the trade. Forex has become exponentially popular in the last few years, with more and more Forex accounts being opened each day. This means more brokers, and that means more competitions between them.
Brokers want you to have your trading account with them; they want to facilitate your trades and they will go to extreme lengths to get you as a customer. Because the broker market has become extremely competitive, they are fighting each other for our business as a trader. This is good for us traders because this keeps their spread prices down.
No one wants to have an account with a broker who charges expensive ASK prices, so thanks to the high demand trading is relatively cheap. But we still need to know how to deal with the differences in BID and ASK prices when we place our trade order, even though most of the time the difference is only a few pips. When placing orders, you need to remember two key rules. Read over them 3 times just to be sure or write them down on a sticky and place it on your trading monitor until you memorize them.
Whenever you are the buyer — the ASK price is quoted. This means when the market reaches 1. So when the price on the chart reaches 1. If you place your pending order with an entry price of 1. To be triggered in you would need to wait for the BID price to reach 1. So in order to be triggered in when the BID price reaches 1. When the market reaches 1. This makes setting stop losses and target levels really easy.
You are exiting at the BID price, this is the price your broker is willing to buy the currency back of you and they are only willing to pay the prices they can normally get from the Interbank Market. When you exit the trade you sell the currency back to them. This uses the BID price. The BID price is what you see on the charts and there is no commission involved, so you simple set the stop and target levels directly off the BID prices you see on the charts.
Short trades enter the market via the BID price, so whatever price is on the chart you want to short from you simply use that price in your short entry order. However, with the stop loss and target prices on short trade we need to calculate Forex spread and factor it in, because we are going to be exiting the trade via the ASK price.
Just like when dealing with the ASK price in your buy entry orders, you simply need to add the market spread onto your stop loss and target prices for your short orders. Doing so will allow your trade to freely move all the way to its stop loss level before the actual stop is triggered.
In the animation above, we wanted to be stopped out if the BID price entered 1. We knew when the BID price was 1. You are exiting at the ASK price. So find your desired target price on the charts, add the market spread to that price and use that in your target price level for every short trade order. Now you know how to correctly place trade orders and enter a Forex trade the right way. Our Price Action Protocol trading system uses logical stop loss levels.
Or maybe seen price reach your trade profit target level, but the trade never closed in profit? How to factor in the spread when placing a trade order When placing orders, you need to remember two key rules. Watch the small animation below for a visual example. Setting Up A Long Entry. I've been trying to find this for the longest time. I have a question however, if i were to sell at bid price my target would be ask price, would that be open ask, high ask, low ask or close ask?
My broker allows me to put any of the 4 options on my chart, but I am not sure which to choose? Hi Diana, thanks very much. That's a good question and I've never come accross this before. I believe there is only one bid and ask price at any given time. Your broker might be defining the 4 data points of a candle in bid and ask prices. If that's the case you need to chose the 'close ask' price for your targets.
The close price of a candle is the current or closing price of a candlestick. It might be a good idea to contact your broker and double check though.
It is a fantastic way to see the cost of the spread on the intra day charts. How do I exit since price always rolls? The bid and ask are just different quote prices from your broker.
The bid is the market price, the ask price is a price that includes your broker's spread. The ask price is invisible, unless you tell your charting software to display it.
All you need to do is add the spread to the bid price to get the ask price when considering trade entry,exit and stop levels.
This was very helpful to me. I assume this is correct? Also how do you work out the variable spread some brokers charge? And, are there any other fees or charges or commissions some brokers may charge? Thanks for your help and for the email updates. With variable spreads, the broker's system will re quote ask prices on each price change to reflect what is available to them on the inter bank market at that current price. The disadvantage is during high volatile events where liquidity dries up, like NFP or central bank policy updates - where the ask prices become very expensive.
Hi Forex Guy, Great article. It helps a lot. I am working with Metatrader and have 1 question. This would mean that my order will be triggered since that's the bid price. Logically I would have to be breakeven when the chart is right on 1. I would only have to pay the spread when I buy back. I am confused now.. You enter with the bid price, which is what you see on the chart. But, you exit at the ask price - which is the broker's price that contains their commission markup. That's why when you open the trade it is in the negative strait away.
All brokers should be required by law to have this video and article posted on their site. Thanks very clear and easy to follow as always. I have been calculating for spread for a while since I've seen you talk about it on one of your videos. Its a same that MT4 doesn't show the ask price or positions the buy and sell off the ask, if that is what they really are going by. They really need to fix that 'glitch'. What is the formula for bid price and also in ask price?
Bid price is what you see on the chart, ask price is whatever the broker sets, which is usually a few pips higher than the bid. In over a year of intensive study of Forex, I have not seen this very important simple and basic principle spelled out nearly as clearly as this! I'm little confused about one thing on Stop Lost SL price which broker will give us. Let say i'm trading in long position, broker will give me Ask price and give me Bid price when i'm going to take profit.
Which price broker will give me on SL price? Long trades enter as ask price, exit at bid. So your stop loss will be hit when bid price triggers it. Short trades are opposite - enter at bid, exit at ask, therefor target and stop loss price get triggered when the ask price touches them. I understand I do so at ASK Let's say I exit a trade after 3hrs Of course everything is quoted with the latest market prices.
Thanks man, I needed this refresher after a few years away.More...