What Is forex spread, and How to calculate it? Beginners need to know.

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Forex Trading Spread Explain, By Forex Forum.​


What is forex spread?

Spreads are an essential part of forex trading—and at first glance, they might seem a bit daunting. They change rapidly, involve math, and worst of all, multiple decimal places. They look indecipherable—but if you put in a little effort, they're actually quite easy to understand.

Forex trading isn't simple. Although we're witnessing an explosive rise in the number of new traders, the fact remains that over 70% of retail traders, meaning individuals, end up losing money in the foreign exchange market.

What are forex spreads?​


FOREX Spread is is the difference between the Buy and the Sell price of any given asset (varies with every broker).

In one of the most common definitions, the spread is the gap between the bid (sell price) and the ask (buy price) of a security or asset, like a stock, bond or commodity. This is known as a bid-ask spread.

Brokers will tell you that most forex currency pairs are traded without commission, but the spread is one cost that applies to any trade that you place. However, rather than charging a commission, all leveraged trading providers will incorporate a spread into the cost of placing a trade.

Why is a spread taken?​


A spread is taken to cover the broker's cost for executing orders. It costs all brokers to place the trades on your behalf, not to mention the cost of developing the platforms, paying employees, marketing etc. It takes a large amount of money for a broker to operate, and this is partially financed by the spread taken from clients - a primary source of funding. Without it, brokers would risk not being able to be financially sustainable as they'd rely solely on traders losing money to earn profits.

How to calculate spreads in forex?​

The impact of spread on trade profitability is often overlooked. Going from a 3-pip spread to a 2-pip spread may not sound like much, and going from a 2-pip spread to a 1.8-pip spread may seem even less significant. But in both cases, depending on your trading style, the impact on profitability can be huge.

When calculating the spread in forex, the most important thing you need to remember is that 1 pip will be equal to the 4th digit after the comma, or the 4th decimal place. For the following example, we will take a look at the most commonly traded pair on the forex market, the USD/EUR.

If you have a sell price of 1.12496, and a buy price of 1.12500, we can see that the difference is 0.00004. Taking our method above with the fourth number after the comma, this means the spread is equal to 0.4pips.

Every trade that occurs on a Forex trading platform will always include two traded currencies also known as a pair. Let's take the British Pound (GBP) and the Japanese Yen (JPY) as a prime calculation example to calculate a sample spread cost that a potential day-trader might inherit for executing one trade. Let's say the GBP is worth 140 Japanese Yen. You believe that the JPY will appreciate by 5 to 145 against the dollar so you place a buy order for 10 units of JPY.

The closest ask-price for 1 GBP is 142 JPY, so you then proceed to place your order. Meanwhile the JPY seller on the other side of the table may have a bid priced at 143. In this case the spread will be calculated as (143-142 YEN) x 10, or 1 Yen for 10 units.

You can also search the internet for various Forex spread calculators that will further assist you in performing simple calculations that will go a long way in putting you in the best possible position to minimize trading costs and maximize profits. You can join a forex forum to learn more about forex trading spread.

Forex spread calculator works this way:

Spread % = (ask price - Bid price) / ask price x 100

Input the Ask price
Input the Bid price

Forex spread types - How many are there?

Although every spread type has one purpose of earning the broker some income they still come in different shapes and sizes. There are way too many to mention here, but the ones that are most important to know about are the following:

  • Bid/ask spread
  • Yield spread
  • Option adjusted spread
  • Negative spread
  • Z spread
Type of forex spread

However, we will still only talk about Bid/ask spreads, Yield spreads and negative spreads as the others are a bit more advanced.

1. What is bid/ask spread
When asking for what is the spread in Forex, people usually mean bid ask spreads, as they are the most common ones to find with Forex brokers because they are such an easy way to get payouts for them. The difference between the bid and the ask price is pretty much what you are paying the broker to receive their service. Although 1 pip may sound really small for making a good income for a company, remember that spreads are calculated according to the size of the lot you are trading.

The BID Price

The BID price is something that you will be very familiar with. The BID price is the price you see on the charts so if EURUSD was printing 1.3000 on your chart then the BID price is 1.3000.

The ASK Price

The ASK price is where things get a little more complicated, the ASK price is responsible for causing those unexpected 'glitches' in your trade orders.

2. Yield spread
Yield spreads are also pretty much the same as bid and ask spreads, but they are usually calculated for different assets. For example, the most popular asset that yield spreads are associated with bonds and here's how they calculate them.

If there are two bonds of equal size and value, the difference between their yields will result in a yield spread.
So, if one bond has a yield of 10% and another has a yield of 5%, this would mean that the yield spread is only 5%.

3. Negative spreads
Negative spreads are only negative for the brokers themselves. Basically what a negative spread means is that you can trade without having to "pay" the broker anything from your trade orders.

4. Fixed and floating spreads
This is not necessarily a "type" of spread for Forex trading simply because every single spread can be either fixed or floating. They're like the types of the types of Forex spreads. A fixed spread is when the broker guarantees that no matter what happens in the market, the spread will remain the same. So, if the spread on EUR/USD was 1 pip, it will stay that way no matter what.

UNDERSTANDING A HIGH SPREAD AND A LOW SPREAD

It's important to note that the FX spread can vary over the course of the day, ranging between a 'high spread' and a 'low spread'.

This is because the spread can be influenced by multiple factors like volatility or liquidity. You will notice that some currency pairs, like emerging market currency pairs, have a greater spread than major currency pairs. Your major currency pairs trade in higher volumes compared to emerging market currencies, and higher trade volumes tend to lead to lower spreads under normal conditions.

Additionally, it's well known that liquidity can dry up and spreads can widen in the lead up to major news events and in between trading sessions.

The Lowest Spread Forex Brokers:

  • FOREX.com
  • Pepperstone
  • IG Markets
  • FXTM

For learn more about forex brokers click here...

Why do spreads widen?

When you place a trade, you are effectively taking on the broker as they assume the risk and are the ones who will pay you out if your trade is profitable. When markets are specifically volatile and it's completely unclear as to which way the market will go and by how much, brokers are obtaining more risk by accepting trades. This is because a market is more likely to make a greater move, which could lose the broker a lot of money. So, to counter this risk, a broker might widen the spread.

You can learn more about forex trading at forum.forex

This is the forex forum for beginners and professional currency market traders. Discuss and share forex trading tactics, currency pairs, tips and forex market data. Analyze forex brokers, leverage and fx signals providers.

Thank You
 
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Good explanation about spread, choosing low spread broker is a matter for a forex trader, mainly when trading, choose pair with the lowest spread like as EURUSD, GBPUSD, USDJPY is a matter for trader, especially when play scalping, because different trading pair maybe different spread, cross pair and exotic pair usually has bigger spread, in FXOpen I like trade EURUSD, but sometimes on Gold, they also has low spread
 
Good explanation about spread, choosing low spread broker is a matter for a forex trader, mainly when trading, choose pair with the lowest spread like as EURUSD, GBPUSD, USDJPY is a matter for trader, especially when play scalping, because different trading pair maybe different spread, cross pair and exotic pair usually has bigger spread, in FXOpen I like trade EURUSD, but sometimes on Gold, they also has low spread
Thank you
 
Excellent post! Spreads are really very important as the biggest part of the overall trading costs depends on spreads alone. I've been using TurnkeyForex primarily because of their low spreads.
 
A very good and detailed explanation of spreads. They are very important while trading in forex. Low spreads allow more profit to the trader in every trade. Brokers usually provide less spread on major currency pairs as these currency pairs have high liquidity and the risk for brokers is less.
 
Great and exhaustive explanation indeed. Choosing a broker that offers low spreads is especially important for scalpers. And since liquidity affects spreads, you can usually avoid high spreads by going with a major pair.
 
@WalletInvestor This is indeed an exhaustive explanation. Knowing how to calculate spreads is helpful in understanding a larger part of your trading costs. Reading about the factors behind spread widening is also important if you want to take measures to reduce these costs.
 
Now that is a great post on spreads, which every novice trader should read. Spreads are one of the most important factors that traders consider when choosing a forex broker. The lower the spreads are, the more profits traders will get to make.
 
This is really a noteworthy post. How much profit you are going to get from a trade depends upon the spreads. When the spreads are higher, they eat up a big chunk of your profit. A trader should know his spreads and plan the trade accordingly.
 
This is really a noteworthy post. How much profit you are going to get from a trade depends upon the spreads. When the spreads are higher, they eat up a big chunk of your profit. A trader should know his spreads and plan the trade accordingly.
Thanks
 
A spread is a crucial part of forex trading, and the way you’ve explained the concept in your post is amazing. I’m sure many of the new traders wouldn’t have heard about all these different types other than the most popular bid/ask spread.
 
Understanding spreads is important while trading in forex. A trader can only save enough profits if he is spending less on spreads. This post will let traders know about the importance of the spreads and help them to focus on finding ways to minimise this major cost.
 
it is indeed very important to understand spreads for beginners. That is a huge aspect to look out for when choosing a forex broker to trade with as different broker has different spreads. If you are aiming for a low spread then I would suggest an ECN broker.
 
it is indeed very important to understand spreads for beginners. That is a huge aspect to look out for when choosing a forex broker to trade with as different broker has different spreads. If you are aiming for a low spread then I would suggest an ECN broker.
ECN brokers are always better, just have to ensure that the commission they charge is not too high, found coinexx good in this aspect, which ecn broker are you using?
 
Beginners find it difficult to understand the concept of spreads due to their complex nature. I hope that beginners reach this post as the concept has been clarified in a very good way here.
 
In the forex market, spread is calculated as the difference between the bid price and the ask price. It is very important for beginners to know how to calculate it, as it determines if the cost in each transaction is appropriate for their trading styles. If beginners incur higher spreads, it indicates either high volatility in the market or low liquidity due to out-of-hours. Also, it is important to opt for a broker that charges moderate spreads so that they can generate more profits.
 
How to show the spread on the chart, there is a certain indicator created to show the spread, maybe you can browse such indicator to help watch the spread on the chart, you can also watch the spread on Marketwatch on Metatrader 4 trading platform.
 
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