What is trading?
How traders make (and lose) money: bid, ask, spread, long and short
Learning objectives
By the end of this lesson, you'll be able to:
Read a two-way quote and say which price you buy at and which price you sell at
Calculate a spread and explain why every trade starts life at a small loss
Explain long and short, including how you can sell something you never owned
Every price is two prices
Open any platform and look at an instrument. You won't see one number. You'll see two.
EUR/USD might be quoted like this:
1.08495 / 1.08505
- The bid is the lower number, 1.08495. This is the price at which the market will buy from you. So this is where you sell.
- The ask (also called the offer) is the higher number, 1.08505. This is the price at which the market will sell to you. So this is where you buy
Beginners get this backwards constantly, so here is the shortcut that works every time: you always transact on the worse of the two prices. You buy high, you sell low. The bid is always below the ask. Never the other way round.
The spread is the gap, and it's a cost
Subtract one from the other:
1.08505 − 1.08495 = 0.00010
That's 0.0001, which is one pip. So EUR/USD is trading with a 1-pip spread.
What does a pip cost? It depends entirely on your position size:
- 0.01 lots (1,000 units): 1 pip ≈ $0.10
- 0.10 lots (10,000 units): 1 pip ≈ $1.00
- 1.00 lot (100,000 units): 1 pip ≈ $10.00
So Anna, opening 0.01 lots of EUR/USD with a 1-pip spread, pays about ten cents to get in. Trivially small. Hold that thought. We'll come back to what happens when it isn't.
Why your trade shows a loss the moment you open it
This is the part nobody warns beginners about, and it produces more panicked support tickets than almost anything else.
Anna buys EUR/USD at the ask: 1.08505.
The platform immediately values her open position at the bid, because the bid is where she'd have to sell to get out. The bid is 1.08495.
Her screen shows −$0.10 before the market has moved a single tick.
Nothing has gone wrong. The broker hasn't cheated her. She has simply paid the spread, and the spread is charged the instant she enters. For Anna to get back to break-even, the bid has to climb to 1.08505. The price must move one full pip in her favour just to get her to zero.
Every trade you ever place starts behind. That is normal. It's also why the cost of trading matters more than most beginners believe.
Spreads move
The 1 pip above is an illustration, not a promise. Spreads are not fixed numbers, and three things reliably widen them:
- News. In the seconds around a major economic release, liquidity thins and spreads on even the most heavily traded pairs can widen substantially.
- Time of day. A pair quoted tightly during the London and New York overlap can be considerably wider in the quiet hours.
- The instrument itself. Major currency pairs are the tightest. Exotic pairs, individual share CFDs and less liquid commodities carry wider spreads as a matter of course.
There's a practical consequence. If you place a stop loss extremely close to your entry, a routine widening of the spread can trigger it, not because the market moved against your idea, but because the bid dropped momentarily to reach your level. Very tight stops are fragile for exactly this reason.
Long and short
There are only two directions.
Long means you buy first and sell later. You profit if the price rises, and lose if it falls. This is the direction everyone understands intuitively, because it's how buying anything works.
Short means you sell first and buy back later. You profit if the price falls, and lose if it rises. This is the direction that confuses people, and the confusion is always the same question:
How can I sell something I don't own?
You aren't selling anything. When you open a short CFD position, no asset changes hands and nothing is taken from anyone. You are opening a contract that gains value as the price falls and loses value as it rises. That's all. Lesson D1.5 covers what a CFD actually is in full.
One extra wrinkle in forex, worth knowing early: every currency trade is simultaneously long one currency and short another. When Anna buys EUR/USD she is long the euro and short the US dollar in the same position. There is no way to be long a currency without being short something else. Currencies are only ever priced against each other.
Anna trades EUR/USD at 0.01 lots. Entry price 1.0850 in both cases.
If she goes long:
- Price rises to 1.0920 → +70 pips → +$7
- Price falls to 1.0780 → −70 pips → −$7
If she goes short:
- Price falls to 1.0780 → +70 pips → +$7
- Price rises to 1.0920 → −70 pips → −$7
Perfectly symmetrical. Which leads to the point of the whole section: the market does not need to go up for you to make money, and it does not need to go down for you to lose it. Direction is a choice you make. Being wrong costs the same in either direction.
Being right isn't enough
Your actual result is not the price move. It's the price move minus everything the trade cost you:
Net result = price movement − spread − commission − overnight financing
- Spread is paid once per round trip, at entry.
- Commission applies on some account types and not others. Check yours.
- Overnight financing (the swap) is charged or credited each night you hold a position past the daily rollover. It doesn't apply if you close the same day.
Lesson F1.5 breaks all three down properly. What matters here is how frequency and size multiply them.
Take that 1-pip spread and hold it constant. Anna makes 20 round trips a month:
- At 0.01 lots: 20 × $0.10 = $2 a month. Ignorable.
- At 0.10 lots: 20 × $1.00 = $20 a month.
- At 1.00 lot: 20 × $10.00 = $200 a month.
Identical trades. Identical decisions. Identical skill. One hundred times the cost.
Now hold size constant and change frequency instead. At 0.10 lots, a trader making 20 round trips a month pays around $20. A trader making 400 pays around $400. Same market, same spread, twenty times the bill.
This is the single most useful thing to understand before you place a trade: costs scale with how big and how often, and they do it whether you are winning or losing. Lesson F1.6 uses this arithmetic to explain why some trading styles are far harder to make work than others.
Key takeaways
Every instrument has two prices: the bid (where you sell) and the ask (where you buy). You always transact on the worse of the two, and the gap between them is the spread
preads widen around news, in illiquid hours, and on less liquid instruments. Stops placed extremely close to entry are vulnerable to this
Long profits from rising prices, short profits from falling prices. A short CFD doesn't sell anything; it opens a contract that gains as the price drops
Your result is the price move minus spread, commission and financing. Costs scale with position size and trade frequency, in both winning and losing months