In many developmental contexts, a locally produced morphogen specifies positional information by forming a concentration gradient over a field of cells. However, during embryonic dorsal-ventral patterning in Drosophila, two members of the bone morphogenetic protein (BMP) family, Decapentaplegic (Dpp) and Screw (Scw), are broadly transcribed but promote receptor-mediated signalling in a restricted subset of expressing cells. Here we use a novel immunostaining protocol to visualize receptor-bound BMPs and show that both proteins become localized to a sharp stripe of dorsal cells. We demonstrate that proper BMP localization involves two distinct processes. First, Dpp undergoes directed, long-range extracellular transport. Scw also undergoes long-range movement, but can do so independently of Dpp transport. Second, an intracellular positive feedback circuit promotes future ligand binding as a function of previous signalling strength. These data elicit a model in which extracellular Dpp transport initially creates a shallow gradient of BMP binding that is acted on by positive intracellular feedback to produce two stable states of BMP-receptor interactions, a spatial bistability in which BMP binding and signalling capabilities are high in dorsal-most cells and low in lateral cells.