The foreign exchange (forex) market is the largest, most liquid market in the world with over $5 trillion exchanging hands daily. When trading currencies, understanding concepts like bid price and ask price is crucial for every forex trader. So what exactly is the ask price in forex trading?
The ask price, also known as the offer price, represents the price at which a forex trader can buy the base currency. It is the price that a forex broker or market maker is willing to accept for selling a currency pair to a trader. The ask price is also referred to as the retail price or long price.
For example, if the EUR/USD bid price is 1.1200 and the ask price is 1.1201, the ask price of 1.1201 is the price at which a forex trader can buy euros with US dollars from the broker.
Understanding the basics of ask prices enables forex traders to know at what rate they can enter into long positions on currency pairs. When trading forex, it’s vital to understand ask prices as they directly impact your buying power and the cost of establishing long positions.
Key Factors That Influence Ask Prices
Several factors impact the ask price in forex trading:
1. Bid-Ask Spread
The difference between the bid and ask price is known as the spread. Forex brokers make money by pocketing this spread or the price difference between the bid and ask prices.
The wider the spread, the greater the profit margin for the broker. So if the bid price is 1.1200 and ask price is 1.1201 for EUR/USD, the spread is the difference of 0.0001 or 1 pip. Generally, the more liquid the currency pair, the tighter the spreads.
2. Liquidity and Volatility
Liquidity refers to how easily currencies can be bought and sold without impacting prices. The most liquid currency pairs like EUR/USD and USD/JPY have tight bid-ask spreads while exotic pairs have wider spreads.
During volatile news events or low liquidity trading hours like weekends, ask prices can widen significantly as the currency’s liquidity dries up. Brokers also widen spreads to account for the increased volatility and risks.
3. Broker’s Business Model
Different forex brokers use different business models which impact the ask prices. Some brokers charge commissions per trade while others make money on wider spreads.
Brokers acting as market makers like Oanda provide their own ask prices while Electronic Communications Network (ECN) brokers like IC Markets connect you directly with liquidity providers for narrower spreads.
4. Currency Strength/Weakness
A currency’s strength or weakness impacts ask prices. Strong demand for a currency like the US dollar will cause brokers to raise USD ask prices. Meanwhile, weaker demand for the euro during uncertainty can lead to lower EUR ask prices.
Quoting Conventions for Ask Prices
There are two main quoting conventions used by forex brokers for ask prices:
1. Bid-Ask Quote
The bid-ask convention quotes currency pairs from the perspective of the broker. It shows the bid price first followed by the ask price.
For EUR/USD quoted as 1.1200/1.1201, the bid price is 1.1200 while the ask price is 1.1201. If buying EUR, you would pay the higher ask price of 1.1201.
2. Inverse Quote
Many brokers outside the US use inverse quoting for currency pairs, especially for USD crosses. The inverse quote shows currency pairs from the buyer’s perspective.
For EUR/USD quoted as 1.1201/1.1200 using inverse quoting, the display 1.1201 represents the ask price from the buyer’s view. 1.1200 is the bid price at which sellers can sell euros to the broker.
Always check your broker’s quoting convention to avoid confusion on bid vs ask prices while trading.
How to Calculate Pip Value using Ask Price
Pip value indicates the value of one pip movement for a currency pair. It’s calculated using the ask price and enables determining your profit or loss from each pip change.
Here’s an example of how to calculate pip value for EUR/USD using its ask price:
EUR/USD Ask Price: 1.1201 Trade Size: 100,000 euros
Pip Value = (Trade Size x Exchange Rate) / Pip
For 4-decimal places brokers, one pip movement is 0.0001.
Substituting values: Pip Value = (100,000 x 1.1201) / 0.0001 = 11,201,000 / 0.0001 = $11.2 per pip movement
Therefore, for each 1 pip change in price, you will gain or lose $11.2 for a 100,000 euro trade size.
Calculating pip value helps determine your position size for risk management and enables calculating potential profits from price movements.
Examples of Ask Price in Action
Let’s see some examples to understand how ask prices work when trading currency pairs:
Going Long EUR/USD
- EUR/USD Ask Price: 1.1203
- You want to buy EUR with USD
- To go long, you pay the ask price of 1.1203 to buy €100,000
- If price rises 10 pips to 1.1213, you gain $112 (10 x $11.2 per pip)
Going Short EUR/USD
- EUR/USD Bid Price: 1.1201
- You want to sell EUR and buy USD
- To go short, you sell at the bid price of 1.1201 for €100,000
- If price falls 15 pips to 1.1186, you gain $168 (15 x $11.2 per pip)
Buying USD/CAD
- USD/CAD Ask Price: 1.3501
- You want to buy USD by selling CAD
- You pay the ask price of 1.3501 to buy $100,000 USD
- If price rises 18 pips to 1.3519, you gain CAD 189 (18 x CAD 10.50 per pip)
The examples illustrate how ask prices are used when establishing long or short positions in forex trading. You always pay the broker’s asking price when entering trades.
Tips for Trading Based on Ask Prices
Here are some useful tips for forex traders when using ask prices:
- Monitor both bid and ask prices as they indicate buy and sell pressure in the market
- Use limit orders to enter at desired ask prices instead of market orders
- Avoid trading when spreads are very wide as you will incur higher costs
- Be aware of rollover impacts at day end when holding open positions
- Account for ask price in your calculations for position sizing and risk management
- Check for any commissions, fees, or charges from your broker on top of ask prices
- Select ECN brokers for tighter ask-bid spreads whenever possible
The Bottom Line
The ask or offer price is a fundamental concept for forex traders to understand. It represents the rate you will pay to buy a currency pair to establish a long position in the market. Being aware of the factors that impact ask prices and how to calculate pip values using them enables you to determine the true cost of every trade.
Overall, monitoring both bid and ask prices provides an invaluable peek into real-time supply and demand dynamics of the forex market. Savvy traders keep a close eye on changing ask prices for entry opportunities and stay sufficiently informed to gain an edge in forex trading.
