Bid, Ask, Spread and Pips

Learning Objectives

• Identify bid and ask quotations.
• Calculate spreads in pips.
• Explain pip and pipette conventions.
• Calculate price changes and illustrative pip values.
• Understand execution risk and trading costs.

1. Introduction to Forex Prices

A Forex chart may show one moving price, but a tradable quotation normally contains two prices: the bid and the ask. Their difference is the spread, and price changes are commonly measured in pips. Understanding these terms helps students read actual quotations and recognize transaction costs before practicing orders.

2. What Is the Bid Price?

The bid is generally the price at which a trader can sell the base currency. For a hypothetical EUR/USD quote of 1.10000 / 1.10012, the bid is 1.10000. A market sell normally uses the available bid, subject to order execution conditions. A displayed quote does not guarantee a fill at that exact price.

3. What Is the Ask Price?

The ask, also called the offer, is generally the price at which a trader can buy the base currency. In EUR/USD 1.10000 / 1.10012, the ask is 1.10012. A market buy normally uses the available ask, subject to execution. The ask is typically higher than the bid.

4. Understanding the Bid–Ask Difference

Suppose EUR/USD bid = 1.10000 and ask = 1.10012. Buying at the ask and immediately selling at the unchanged bid gives 1.10000 − 1.10012 = −0.00012, or −1.2 pips. This simplified example assumes both orders execute at the displayed prices and excludes separate commissions and fees. It explains why a newly opened position may initially show a negative floating result.

5. What Is the Forex Spread?

Spread = Ask Price − Bid Price. Suppose EUR/USD bid = 1.08500 and ask = 1.08515. The spread is 0.00015. Using a conventional pip size of 0.0001 for EUR/USD, the spread is 0.00015 ÷ 0.0001 = 1.5 pips. The spread is one component of transaction costs; commissions and financing may also apply.

6. Why Do Forex Spreads Change?

Quoted spreads may vary with liquidity, volatility, economic announcements, trading sessions, holidays and broker pricing. During active conditions, competing quotations may contribute to narrower spreads. During disrupted or less liquid conditions, spreads may widen. An advertised minimum spread is not a promise that it will always be available.

7. Fixed and Variable Spreads

A fixed-spread product aims to maintain a stated spread under conditions specified by the provider, although exceptions and other terms may apply. A variable spread responds to pricing and market conditions. Neither model necessarily has the lowest total trading cost. Review commissions, financing, execution rules and other fees.

8. What Is a Pip?

A pip is a conventional unit of exchange-rate movement. For many non-JPY Forex pairs, one pip is 0.0001. If EUR/USD moves from 1.1000 to 1.1010, the difference is 0.0010, equal to 10 pips. A pip is a price unit, not a fixed amount of money earned or lost.

9. Pips in Japanese Yen Pairs

For many JPY currency pairs, one conventional pip is 0.01. If USD/JPY rises from 150.00 to 150.25, it rises 25 pips. If GBP/JPY falls from 190.50 to 189.80, it falls 70 pips. Students should confirm pip conventions and product specifications rather than assuming the same decimal size for every instrument.

10. What Is a Pipette?

A pipette is commonly one-tenth of a pip. For many non-JPY pairs, 1 pipette = 0.00001; for many JPY pairs, 1 pipette = 0.001. A five-decimal EUR/USD quote such as 1.10012 includes a fractional pip in the last digit. Broker quotation conventions may vary.

11. How to Calculate Pip Movements

Pip movement = (New Price − Old Price) ÷ Pip Size. For GBP/USD moving from 1.2500 to 1.2535, the difference is 0.0035 ÷ 0.0001 = +35 pips. For USD/JPY moving from 150.20 to 149.90, the difference is −0.30 ÷ 0.01 = −30 pips. A price move's sign does not by itself determine whether an individual trade gained or lost.

12. Understanding Pip Value

Pip movement describes a change in the exchange rate. Pip value measures the monetary effect of one pip for a specific position. For an illustrative EUR/USD position representing 10,000 euros, one pip is 0.0001 USD per euro, so 10,000 × 0.0001 = 1 USD per pip. Account-currency conversions, contract specifications and derivative terms may change the monetary calculation.

13. How Spread Affects a Buy Trade

Assume EUR/USD bid = 1.10000 and ask = 1.10012. A hypothetical buy executes at 1.10012. If the bid later reaches 1.10100 and the position closes at that bid, the gross price difference is 1.10100 − 1.10012 = 0.00088, or 8.8 pips. This excludes commissions, financing and other execution costs.

14. How Spread Affects a Sell Trade

Assume EUR/USD bid = 1.20000 and ask = 1.20015. A hypothetical short sale executes at 1.20000. If the ask later falls to 1.19900 and the short closes at that ask, the gross favorable price difference is 1.20000 − 1.19900 = 0.00100, or 10 pips. A short position can also lose money if prices rise.

15. Common Beginner Mistakes

Common mistakes include confusing bid with ask, overlooking the spread, assuming spreads are constant, treating pip movements as fixed monetary gains, using 0.0001 for JPY pairs where 0.01 is conventional, and assuming every displayed quote is a guaranteed fill. Always examine instrument specifications and execution conditions.

16. Beginner Practice Exercises

Exercise A: EUR/USD is quoted at 1.08500 / 1.08518. Identify the bid, ask and spread in pips. Exercise B: GBP/USD moves from 1.2500 to 1.2545; calculate the upward pip movement. Exercise C: USD/JPY moves from 150.50 to 149.90; calculate the downward pip movement. Exercise D: For an illustrative EUR/USD position of 10,000 euros, calculate pip value in USD using a pip size of 0.0001.

17. Lesson Summary

The bid is generally the price used when selling the base currency, while the ask is generally used when buying it. Their difference is the spread. Pips and pipettes measure price movements, while pip value translates a pip into a monetary amount for a specified position. Always consider both sides of the quote, trading costs and execution risk.

18. Knowledge Check

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