I get the following question often from visitors to this site.  "I'm confused about the bid and ask.  Which is used when I go long and which when I exit the position? Which is used when I go short?"  It goes something like this but of course the questions vary in wording.  This is a wet behind the ears, beginner question that a lot of us now should be able to answer so I will try.

The best way to answer the question is with an example.

Assumptions: 

1. You put an order to go long on GBP/USD at 1.9030
2. You want a 30 pip profit
3. You want to risk 30 pips
4. The GBP/USD has a 5 pip spread

When going long, the ASK price is used to initiate the order.  So in our case, when the GBP/USD gets to a price of 1.9025/1.9030, an order is opened to go long.  When the position is opened, you will be down 5 pips.  That is because if you want to turn around at the same instant and close your position, you will have to sell it back using the BID price which is at 1.9025.  You had just bought it at 1.9030.  

So you have a long position opened at 1.9030.  You want to close it once it reaches a profit of 30 pips.  If we reach 1.9060, we will sell it back.  Since we use the bid price when selling, the position will close once the bid/ask is 1.9060/1.9065.

The same goes if your stop loss is hit.  Your stop/loss is set for 1.9000/1.9005 since the bid price of 1.9000 is used when selling and is exactly 30 pips from our entry of 1.9030. 

Here an opposite example.

Assumptions: 

1. You put an order to go short on GBP/USD at 1.9030
2. You want a 30 pip profit
3. You want to risk 30 pips
4. The GBP/USD has a 5 pip spread

When going short, the BID price is used to initiate the order.  So in our case, when the GBP/USD gets to a price of 1.9030/1.9035, an order is opened to go short.  When the position is opened, you will be down 5 pips.  That is because if you want to turn around at the same instant and close your position, you will have to buy it back using the ASK price which is at 1.9035.  You just sold it at 1.9030.  

So you have a short position opened at 1.9030.  You want to close it once it reaches a profit of 30 pips.  If we reach 1.9000, we will buy it back.  Since we use the ask price when buying, the position will close once the bid/ask is 1.8995/1.9000.

The same goes if your stop loss is hit.  Your stop/loss is set for 1.9055/1.9060 since the ask price of 1.9060 is used when buying and is exactly 30 pips from our entry of 1.9030.

This certainly isn't as easy as it seems to explain or simplify.  If anyone has a better way of explaining, post it as a comment and I'll put it on the front page. 

Read or add comments about this item.

No. 1 :

This is the line I used to use when I first started.

"Buy the ASK , Sell the BID"

Submitted by Nik • 2007-03-14 20:16:36

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