Bid, ask and the spread
In the previous lesson, you learned how pips, lots and position size help measure a trade. Now you will connect those ideas to the two prices shown in a quote: the bid and the ask. Understanding their difference helps explain why a new position often starts with a small unrealised loss.
Two prices, two purposes
A trading quote normally has two prices. The bid is the price at which you can sell, while the ask is the price at which you can buy. The ask is normally higher than the bid. These prices apply to opposite sides of a transaction, rather than offering a choice of two prices for the same action.
For a buy position, also called a long position, you enter at the ask and close by selling at the bid. For a sell position, also called a short position, you enter at the bid and close by buying at the ask. These are the relevant sides of the quote; the final execution price can differ from the displayed price as market conditions change.
What the spread measures
The spread is the difference between the ask and the bid: spread = ask − bid. In forex, it is commonly expressed in pips. For EURUSD, one pip is 0.0001, so a difference of 0.0002 equals two pips. On a five-decimal EURUSD quote, the final decimal represents one-tenth of a pip, often called a point.
The spread is a trading cost built into the difference between buying and selling prices. If you open a position and immediately close it at unchanged quotes, the price difference produces a loss equal to the spread’s monetary value. A larger position makes the same spread more costly in money terms. Commissions, overnight financing and other applicable charges are separate costs.
Worked example: a two-pip spread
Consider a hypothetical EURUSD quote with a bid of 1.1000 and an ask of 1.1002. The spread is 1.1002 − 1.1000 = 0.0002, or two pips. You buy 0.10 standard lot, equal to 10,000 euros. Since one pip is worth USD 10 per standard lot on EURUSD, one pip for this position is worth USD 1.
Your entry price is 1.1002. An immediate sale at the unchanged bid of 1.1000 would lose two pips, or USD 2, excluding other costs. If the bid later reaches 1.1010 and you close at that price, the gain is eight pips, or USD 8, before other costs. Do not subtract the spread again: the actual entry-to-exit price difference already includes its effect.
Why spreads can change
Spreads are not necessarily constant. They can widen or narrow as liquidity and market conditions change. Liquidity describes how readily an instrument can be bought or sold without significantly affecting its price. Around major economic announcements, during quieter trading periods or near market transitions, there may be less available liquidity or greater uncertainty, which can lead to wider spreads.
A wider spread can affect a position even when one side of the quote barely changes. For example, if the bid falls while the ask stays unchanged, a buy position’s current closing value falls. This is why watching only one chart price may not fully explain changes in unrealised profit or loss. The relevant closing side of the quote matters.
Reading quotes in MT5
In MT5, Market Watch displays bid and ask quotes for instruments, and a spread column can be enabled. Check the units before interpreting a displayed spread: points are not always the same as pips. For five-decimal EURUSD quotes, 20 points equal two pips. Instrument specifications help explain price precision and contract size; avoid applying forex pip conventions automatically to gold or other CFDs.
A chart may show only one price stream, so its visible line is not necessarily the price available for both buying and selling. Compare the bid and ask when reviewing an entry, exit or displayed result. Understanding spreads is only one part of understanding trading risk. CFDs are leveraged and carry a high risk of loss; the next lesson explains leverage and margin.
- Buy at the ask and sell at the bid, including when closing positions.
- The spread equals the ask minus the bid.
- Position size determines the monetary effect of a given spread.
- Spreads can change, and other trading costs may also apply.