Forex Basic - Bid & Ask, Spread & Pips and Long & Short

Before start trading, you must know some basics of MT4 and MT5 price charts in order to understand the market movements and conditions.

Are you now looking at a price chart on MT4 or MT5 platforms?

Then, start from the following 3 basics!

If you haven’t opened an account yet, you can open one with XM from below.

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1. Bid and Ask Prices

A speculator may buy or sell any currency pair at any time; we say he is choosing ‘direction’.

A price quote of any currency pair always includes two prices; a bid as well as an offer.

The bid price which is always lower is quoted first or on the left, it is the price at which an investor can sell the currency pair.

The ask price is generally of a slightly higher value, quoted second and displayed on the right; it is the price at which a currency pair can be bought.

Example: USDJPY price quote is 120.60 / 120.63, USDJPY can be sold at 120.60 (the bid) or bought at 120.63 (the ask).

2. Forex Spread and Pips

The word ‘pip’ is used to describe a price difference.

1 pip is the smallest possible price change; it is an increase or decrease of 1 unit of the last decimal shown in a price.

Example: price change from 1.9225 to 1.9226 is 1 pip. CHFSAR price change from 3.0798 to 3.0785 is 13 pips. XAGUSD price change from 13.02 to 13.35 is 33 pips.

The ‘spread’ is the price difference of the bid and the ask, in the above example of the USDJPY price quotation of 120.60 / 120.63, the spread was 3 pips.

The more liquid the currency pair, the smaller or ‘tighter’ the spread will be quoted.

A lot of investors ask us about the value of one pip.

The answer is not a fixed amount in US Dollars or another specific currency.

The value of one pip will depend on the currency pair and trade amount.

3. Long and Short positions

Are expressions used to describe the direction of a trade.

After taking the offer, the speculator is buying a currency pair and will be considered to be long.

By selling USDJPY on the bid, he is effectively short.

Going short on a currency pair expresses the view that the first named currency should lose value relative to the 2nd named currency.

The seller is expecting a price drop, whereas the buyer or holder of a long position expects prices to rise.

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