Has it ever happened to you that you had opened a trade but got stopped out before your price triggered the stop loss?
Or perhaps, you could have sworn the price actually hit the Take profit target yet the trade finally closed at a loss.
Maybe you fix a pending buying order at a specific price level and the and by the twist of luck, the market actually hits your specified price level yet the trade never gets activated.
Now you must be wondering, “What is going on here?” Probably, you have even started blaming the market for your losses or taking out all your frustration and anxiety on your broker.
If this is a frequently occurring problem for you, then you probably have come up with some conspiracy theories about how the market or your broker is out to get you or they are making it extremely hard for you to profit in Forex trading.
I hate to burst your bubble, but here is the truth. The market or the broker is not out to get you. The only person to blame here is, You!
Apart from the market prices, you also need to incorporate the spread rates into your calculation while placing a trade. A good Forex trader knows to calculate the spread rates to make sure that the inconsistencies in trade prices do not occur or you are kicked out of the trade before the prices could trigger your stop loss.
In the present article, you will learn more about spreads – which is the difference between the BID and the ASK prices. I will also tell you how you can calculate the market spreads into your trades to make sure the recurring problems with your trades do not occur.
What are BID and ASK Prices?
As a Forex trader, you need to be well aware of the meanings of the terms “Bid” and “Ask” prices and how they differ from each other. Failing to grasp the meaning of these two can result in costly mistakes while trading in the market.
When you look at your trading screen, you will always see these two prices – BID and ASK prices and every time you open a new position in the market, these prices will have a part to play. Hence, it is vital that you’re completely aware of the effects of these two prices on your trades.
The BID Price
You must already know of the BID price. It is the price which you can see when you open your trading charts. Suppose, if the chart says that the EURUSD is at 1.3000 on your chart, then the BID price of that currency pair is 1.3000.
Every time you open a selling position, it is this BID price that you deal with. It is the price that your broker is agreeing to buy that currency from you. You are essentially selling the currency at that BID price to your broker.
The ASK Price
The ASK price is the one which causes the inconsistencies in the chart prices when you place a trade order. It is slightly more difficult to comprehend than the BID price.
The ASK price is usually not displayed on the trading charts. It is revealed only when you open the trade order window to place a new trade.
Your broker is agreeing to sell the currency to you at the ASK price which is a different price from what is displayed on the charts. Every time you open a long position, that is, give a buying order, you are dealing with the ASK price. It is more costly than the BID price which is displayed on your charts.
Your Forex broker is basically ‘asking’ the ASK price to buy the currency from you. Now, go back to the previous example. Remember, how the BID price of EURUSD was 1.3000? In this case, the ASK price would be something a little more than that, like 1.3003. The spread in Forex can be calculated by the difference between the BID and ASK price.