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What is Spread in Forex?

The forex market is full of complicated terms. Interestingly, it is not only beginners who have difficulty understanding these terms. Spread is a term that many forex traders have difficulty understanding. We will discuss the meaning of this term and other related information with you.

Spread means to expand something. But in the forex world, spread is the difference between the buying price and selling price of a product.

There are two prices in every product (currency pair); the bid price and the ask price. The price at which you can sell the base currency is the bid price. On the other hand, the ask price is the price used to buy the base currency.

The base currency is the currency that is ranked first in the product. The counter, bid or quote currency is the second currency. This helps you determine how much one unit of the base currency is worth in the counter currency. Remember, the bid price will always be lower than the ask price, and the market price is somewhere in between these two prices.

In general, experts trade forex products without commission. However, a spread cost is charged on almost every trade. Instead of a commission, each leveraged trading provider adds a spread to the trade value.

Factors such as volatility, the currency pair, and your trade size affect the spread. The provider you use can also make a big difference. While some institutions apply competitive spread rates to attract more investors, others do the opposite.

What Does Spread Mean?

Experts use the term pip to measure spread. For those who haven’t heard of it before, a pip is a small unit of movement in the price of a product or currency pair. It usually represents the fourth digit after the decimal point in a quote. This rule applies to most currency pairs, with a few exceptions, such as the Japanese yen. In the Japanese yen, the pip is the second digit after the decimal point.

When there is a large difference between prices, spreads can also be high. This usually means that liquidity is low and volatility is high. On the other hand, a low spread emphasizes high liquidity and low volatility. Therefore, pairs with high liquidity, such as forex majors, usually have tighter spreads and therefore lower costs to trade.

Variable and Fixed Spreads

Usually, investors pay spread costs unknowingly when trading. These costs can accumulate and reach significant amounts. Therefore, it is a situation that should be taken into consideration when choosing a forex broker.

Many forex brokers offer two types of spreads; fixed and variable. For investors wondering which is better, we can say that there is no answer to this question. Experts have different opinions on this subject. In addition, trading styles are also determinants of which spread type is better.

Variable Spreads

In this type of spread, the difference between the buying and selling price of a product or currency pair fluctuates frequently. For example, in the EURUSD product, variable spreads usually have a difference of around one to four pips. However, when the market is volatile, things can be very different and the spread can widen by eight to ten pips depending on market conditions.

Fixed Spreads

Not like variable spreads, they remain predetermined and are fixed according to the broker’s structure. A fixed spread usually falls within a variable spread range.

Fixed spreads allow traders to create strategies more efficiently than variable spreads. Therefore, they can be very useful, especially during critical periods for traders.

How to Calculate Spread in Forex?

Calculating the cost of a forex spread is not as complicated as most traders think. Traders always receive forex quotes with bid and ask prices. The bid price is the price that the forex market maker is willing to offer by providing the counter currency for the base currency.

On the contrary, the price that a forex market maker decides to give by exchanging the base currency for the counter currency will be the ask price. You will usually find forex prices stated in five decimal places. For example, if we had a bid price of USDCAD around 1.35600 and an ask price of 1.35650. In this case, the spread would be equal to 0.0005 (5 pips), which is then multiplied by your trade size.

Forex Spread Indicators

A spread indicator can be a useful tool among forex traders. It shows the difference between the bid and ask prices of an asset. Some spread indicators show the spread in a graphical curve, while others simply show the live spread on the chart in pips. As mentioned earlier, products with high liquidity usually have low spreads.

To calculate spreads, you need to determine the difference between the bid and ask prices, which can be very tedious to do manually, especially when dealing with very rapid changes in a quote with several decimal places. You can find many different FX spread indicators online and you can choose a user-friendly option to ensure your trading experience is smooth. Some platforms have such indicators built-in.