BID price and ASK price

Do you know what BID and ASK prices are?

If you have ever seen the pack to buy or sell from a brokeryou will have seen that all Forex quotes (and those of other securities) They include two prices, the offer or sale and the ask or purchase. The sale is always less than the purchase price.

In this way the sale It is the price that the broker is willing to buy the base currency in exchange for the quote currency. This means that the sale is the price at which we are going to sell. In the purchase it is the price at which the broker will sell the base currency in exchange for the quote currency. The difference between the ask and the buy price is the spread.

In this example of GBP/JPY, the ask price is 135.44 and the buy price is 135.45. If we want to sell GBP (Pounds), we click on “Sell” and we sell at 135.44 pounds. If we buy GBP, you click “Buy” and we buy at 135.45 pounds. We are going to use fundamental analysis to help us decide whether to buy or sell a particular currency pair, this way of trading is not a system, it is economic reasoning.

Let’s imagine the EUR/USD for instance. The euro is the base currency and therefore the “basis” for buying/selling. If we believe that the US economy will weaken, which is bad for the US dollar, a BUY EUR/USD order will be executed. In this way we have bought euros in the expectation that it will rise against the US dollar.

If we believe that the US economy is strong and the Euro will weaken against the US Dollar, then a SELL EUR/USD order will be executed. In this way we have sold euros in the expectation that they will fall against the US dollar.

If we use the USD/CHF, the USD is the base currency and therefore the “basis” for buying/selling. If we think the Swiss franc is overvalued, a BUY USD/CHF order will be executed. In this way we have bought US dollars in the expectation that they will appreciate against the Swiss franc. If we believe the dollar will weaken, then we will place a SELL USD/CHF order. We understand that the US dollars are going to depreciate against the Swiss franc.

What is currency swap?

Once we have understood how to buy and how to sell, we have to know an important aspect of the Forex market, this aspect is the Currency Swap. The Swap is a contract between two parties who agree to exchange future cash flows based on a pre-established formula.

For open positions at our broker’s “closing time”, usually after 00:00 (Spanish time GMT+1), there is a daily interest rate (swap) that a trader has to pay or earn, depending on their established margin and position in the market (Long or Short).

If you do not want to earn or pay interest on your positions, we must ensure that they are all closed before 00:00, which is the end of the market day. This is because each currency implies a loan of one currency to buy another, Swap interest is part of Forex Trading. Interest is paid in the currency borrowed, and earned in the currency purchased.

If a client is buying a currency with a higher interest rate than the one they are lending, the net spread will be positive (eg USD/JPY), and the client will earn the funds by making the trade. Keep in mind that brokers adjust their Swap rates based on different factors (for example: account leverage, interbank lending rates).

Sounds interesting to you, right? Keep learning with DTP with upcoming articles on our Blog.

Leave a Comment