"Bid Price: At this price, the trader can **sell** the base currency?" sell or buy?

hiya,

Thnx a lot for school! but I don’t understand this:
1)"Bid Price

The bid is the price at which the market is prepared to buy a specific currency pair in the forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation."

e.g: GBP/USD when we expecting to get bullish, we buy GBP and press the left button/quote in broker system. As we expected to price rise up, we buy GBP. So we buy the base currency? but why above in school is written sell?

2)"Ask/Offer Price

The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation."

e.g: GBP/USD when we expecting to get bearish, we sell GBP and press the right button/quote in broker system. As we expected to price fall down, we sell GBP. So we sell the base currency? but why above in school is written buy?

Any idea?

Thnx

[quote=“campione, post:1, topic:109408, full:true”]

Thnx a lot for school! but I don’t understand this …[/quote]

Let’s clear up your confusion by defining some terms:

Whenever you transact business with (or through) your broker, you are dealing with “the market”, as the School lesson is using that term.

If your broker is a market-maker, then your transactions are with your broker. If your broker is a true ECN broker, then your transactions are with an entity in the ECN, upstream from your broker. For the purpose of answering the question in your post, it doesn’t matter who takes the other side of your trade – your broker, or some entity in the ECN – someone is acting as counterparty to your trade, and the School lesson is referring to that “someone” as “the market”.

To keep things as simple as possible, let’s say your broker is a market-maker.

In this case, every position (trade) you open puts your broker in an equal and opposite position to yours. That is, if you go LONG one lot of EUR/USD, you automatically place your broker in the position of being SHORT one lot of EUR/USD. And when you exit your trade, your LONG position and your broker’s SHORT position both get reversed.

The only question now is: At what prices are these transactions carried out?

You don’t get to set the prices – either the price to enter or the price to exit this hypothetical trade. Those prices are set by your broker. In trading terminology, we say that your broker is the price maker, and you are the price taker.

Your broker continuously sets two prices for each currency pair: a BID price, and an ASK price.

Your broker’s BID price is the price he is offering to pay for a particular currency pair, if you (or anyone else) wants to SELL to him at that price. He “bids” for EUR/USD (in this example), and you accept his BID price (say 1.1673) and SELL to him at that price, if you so choose. In trading terminology, we say that you (the retail customer) SELL at the BID price.

Your broker’s ASK price is the price he is demanding from you, if you choose to BUY from him. He “asks” for a particular price (say 1.1675 for EUR/USD), and if you want to BUY the EUR/USD, you have to pay the price he sets. In trading terminology, we say that you BUY at the ASK price.

Drill these two phrases into your brain:

  • BUY at the ASK price, SELL at the BID price.

  • The ASK price is always higher than the BID price.

When you know those two phrases as well as you know your own name, then the concept that has been confusing you will become clear in your mind.

Most likely, your charts are set to show only one price series – either your broker’s BID prices, or his ASK prices – for each pair. Obviously, at any given moment, the difference between the BID price and the ASK price for each pair is the SPREAD for that pair.

Most traders display BID prices on their charts. But, you could choose to display ASK prices, instead. And you can always switch back and forth, in order to see the specific prices at which you can BUY and SELL any particular pair.

But, always be certain of which price is displayed on your chart at any given time. If your chart is showing you BID prices, then you know that you can SELL at the price you see displayed. But, to BUY, you need to ADD the spread to the BID price, in order to determine the ASK price.

Conversely, if your chart is showing you ASK prices, then you know that you can BUY at the price you see displayed. But, if you want to SELL, you need to SUBTRACT the spread from the ASK price, in order to determine the BID price.

Lastly, train yourself to think in terms of “going LONG or going SHORT”, not “buying or selling” – even though we all use the buying/selling terminology.

In the retail forex market, there is no buying or selling of individual currencies or currency pairs.

Nevertheless, every broker platform out there offers customers prices at which they can “buy” or “sell”. The buy/sell terminology, which is accurate and appropriate in many markets, has been adopted in the forex market, where it is totally inaccurate and inappropriate. But, it has become so ingrained in our market that we will never get rid of it. Don’t let it confuse you.

Even worse, many authors and teachers will tell you that a LONG position in the forex market involves “buying the base currency, and selling the quote currency” – which is a total fiction.

As stated above, there is no buying or selling in the retail forex market.

I hope that helps to clear things up for you.

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Hiya @Clint

Thanks for explanation, it was great. May I conclude in below:
When we have X/Y pair, we assume with position size Z, we contract(not actually buy or sell, just contract to it) to {buy~sell} equal to Z multiple Y amount of X, while expecting that price of X will respectfully {raise~fall} ?

Is above conclusion correct?

Thnx

In your example, it’s always ‘Y’ that would fluctuate in value, whilst ‘X’ is always constant. ‘X’ is the base currency.

Example: GBP/USD at a rate of 1.5000

Long 1 standard lot

Open Long Position: +£100,000 = -$150,000

Rate now changes to 1.6000, and you want to close your long position

Close Long Position: -£100,000 = +$160,000

See the above? ‘X’ in [XXX/YYY] always stays constant.

The above as all BS though from a retail point of view - but that’s how it works when you’re actually buying and selling FX.

If I understand your question, then I agree with all of it, except one part.

You have phrased your question as if you were writing a mathematical equation. Allow me to substitute forex market quantities for your X, Y, and Z, as follows:

X = EUR
Y = USD
Z = one standard lot (100,000 units)

So now, lets see how a 1-lot position size factors into a EUR/USD trade. Let’s use a LONG position for this example.

You “buy” (go LONG) one lot of EUR/USD. This means that you are LONG 100,000 units of the EUR/USD pair.

And this, in turn, means that you are LONG 100,000 units of EUR priced in USD.

Let’s say the price at time of entry is EUR/USD = 1.1640 / 41. This means that your broker’s BID price is 1.1640 and his ASK price is 1.1641. You “bought” (went LONG) the pair, and buying is always done at the broker’s ASK price. So, you bought (entered LONG) at 1.1641.

The notional value of your trade is 100,000 EUR. If your account is denominated in EUR, you don’t have to do any currency conversion at this point. However, if your account is denominated in some other currency, you will have to do the conversion, in order to determine the notional value of your trade in your account currency. For example, if your account is denominated in USD, then we know (from the price at the time of entry) that the notional value is 116,410 USD, because 100,000 EUR = 116,410 USD when the price of EUR/USD is 1.1641.

For convenience, let’s say that your account is denominated in USD.

Let’s see how the value of the two currencies in your pair might change. There are several possibilities.

  • The value of the EUR could rise versus other major currencies, while the value of the USD remains steady versus all other major currencies except the EUR.

  • The value of the EUR could remain steady versus all other major currencies except the USD, while the value of the USD falls versus all the other major currencies.

  • Both of the above conditions could happen at the same time. That is, the EUR could rise versus other major currencies, while the USD falls versus other major currencies.

  • The EUR and the USD could both rise in value versus other major currencies, with the EUR rising more (percentage-wise) than the USD.

  • The EUR and the USD could both fall in value versus other major currencies, with the USD falling more (percentage-wise) than the EUR.

In each of these five scenarios, the price of EUR/USD would rise, and your LONG position would move into profit.

Let’s say that one of these five scenarios takes place, and the price of EUR/USD increases to 1.1675 / 76. In order to close your profitable EUR/USD position, you would have to “sell” one lot at your broker’s BID price of 1.1675. Your profit (in pips) would then be the difference between your entry at 1.1641 and your exit at 1.1675 – that is, 34 pips.

The value in USD (your assumed account currency) of these 34 pips would be $340. We know this, because when the account currency matches the quote currency of the pair being traded, the pip-value is always 10 units of account currency per standard lot traded. So, $10/pip x 34 pips = $340.

Notice that it does not matter which one of the five scenarios described above resulted in the EUR/USD price rise. All of the math is based on the relative price change between the base currency (EUR. in this case) and the quote currency (USD, in this case).

I hope that long-winded explanation was helpful.

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