Buy the ASK Sell the BID

Here are some helpful visitor comments received in the last 24 hours.

The first relates to the confusion regarding bid and ask prices experienced by beginner traders.

Posted by Nik 

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

"Buy the ASK , Sell the BID"

The second is an observation regarding trading systems offered by others and backtesting.

Posted by Dropout

Anyone offering a new system should be able–at minimum–to say that
they've manually backtested it for at least a year's worth of data,
resulting in "x" number of winning trades and "y" losing trades, for a
profit of "z."

However,
99.9% of the time, experts selling systems, and those posting their
systems on message boards, say, basically, "Here's a system I've been
fooling around with. I looked back at a few trades I could have made
with it, and it looks really good." Then, they and others who follow
their advice start trading the system with live accounts.

As you can probably tell from my tone, I think this is a bad idea.

Popularity: 12%

Bid and Ask Confusion in Forex

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. 

Popularity: 2%