Most people know what trading is, but very few know what is the difference between the bid and ask size is in forex trading.
Trading in forex is a fast-paced, high stakes activity that requires careful risk management.
This post will help you understand what bid size and ask size are in forex and how it affects your trading strategy.
Whether you are an experienced forex trader or just starting out in forex, knowing what bid size and ask size are in fx will help you to be successful in the long run.
Learn more about bid size and ask size in foreign exchange and how it affects your forex strategies.
What Is Bid Size in Forex Trading?
The bid size is how much a trader is willing to purchase a currency pair.
In other words, what investors are prepared to pay for the securities.
In FX, the bid size value is always higher than the ask size value. The bid size is determined by the institutional trader services.
The dealers determine the bid size based on their trading volume.
A dealer’s bid size usually indicates the range of the market.
Dealers are also known as market makers who buy and sell shares on the stock market.
A market maker is a firm that has an inventory of shares that it is willing to buy or sell at the current share value.
They buy and sell shares at the bid and offer share value, which is the amount they pay and receive for their share orders.
Market makers are essential to investing with shares and other assets because they allow for liquidity, or the ability to quickly buy and sell shares.
In financial exchanges, most traders use a bid/ask spread, which is the difference between the bid and ask sizes.
The spread varies from each currency pair and can be as low as 0 pips or as high as 8 pips.
The bid size and spread are often used to gauge whether the asset is volatile or not and how liquid it is.
If the spread is wider than normal, it would suggest that currently, the asset is volatile and not very liquid.
You will see this when the NFP figures are released each month – watch the spread to enter or sell a position, they will widen.
It’s easier to represent this using an investor buying shares as an example:
If you are looking to buy or sell a share, you will be presented with a range of prices at which you can buy or sell the share at the right level.
The lowest price you can buy or sell the stock for is called the ‘bid’ and the highest price you can buy or sell the stock for is called the ‘ask.’
The difference between these two numbers is known as the spread and it represents the amount of money the seller wants to make on the transaction.
The bid size is the amount of a particular security that investors are offering to buy at the specified bid price.
Investors interpret differences in the bid size and ask size as representing the supply and demand relationship for that asset.
When looking for an item on the web, you might see the best available bid price, and sometimes you can also see the lowest price or the lowest bid price.
If you are interested in buying a specific item, you can often get more information by looking at the level 2 quotes, these are most common when investing in stocks where you can see all of the depth of the level 2 values.
How Bid Size Works (A Quick Overview)
In order to ensure a win-win situation for everyone involved, the seller is required to meet the minimum bid price when investing in stocks.
If the price offered is less than the minimum, there is no point for the other trader to bid.
For this reason, a trader can lose money if he/she has placed an order above the minimum price and the market price is lower than the price level offered.
To avoid losing profits due to price volatility, traders must have enough liquidity (or money available to buy or sell) to meet the minimum price level.
The price at which the trader is quoting is known as the bid price.
The amount of currency that the buyer wants to purchase is known as the ask price quote.
The ask price is the maximum amount of currency that the buyer is willing to pay.
The bid and ask prices are determined by the liquidity in the market.
In other words, the more liquid a market is, the lower the bid and ask prices will be.
The best available offer (BAO) is the highest bid size of all the buyers who want to buy the stock.
So if there are two buyers bidding on a stock and both are willing to pay $50 per share for the stock, yet another investor would want to purchase them for $51, then the best available offer (BAO) would be the higher bid size, which is $51.
Bid sizes and ask sizes are key indicators of supply and demand in all markets and many investors use level 2 depth tools to discover how liquid their order could be.
When the asking price of n asset is high, that means that there is a lot of interest in selling that asset.
If the asking price of a security is low, then it means that there is less interest in selling that security.
Conclusion
So, now you know what bid size is and why it can be an important tool when trading foreign exchange markets.
The key idea behind bid size is that you should only use it as a tool to get an idea of how much liquidity exists in the market at any given time.
As you will see, using bid size is a very simple process, and a great first step in learning to trade the forex market.
For more information on the topic of forex trading, check out the articles below: