The spread in forex is a small cost built into the buy (bid) and sell (ask) price of every currency pair trade. When you look at the price that’s quoted for a currency pair, you will see there is a difference between the buy and sell prices – this is the spread or the bid/ask spread.
Changes in the spread are measured by small price movements called pips – which is any change in the fourth decimal place of a currency pair (or second decimal place when trading pairs quoted in JPY). It is not only the spread that will determine the total cost of your trade, but also the lot size.
Important Points
- The forex spread is the difference between a forex broker’s sell rate and buy rate when exchanging or trading currencies.
- Spreads can be narrower or wider, depending on the currency involved, the time of day a trade is initiated, and economic conditions.
- Brokers can add to or widen their bid-ask spread, meaning an investor would pay more when buying and receive less when selling.
- A forex spread is the primary cost of a currency trade, built into the buy and sell price of an FX pair
- A spread is measured in pips, which is a movement at the fourth decimal place in a forex pair’s quote (or second place if quoted in JPY)
- To calculate the forex spread, subtract the buy price from the sell price
- Forex spreads are always variable, whereas other markets’ spreads may be fixed
- Spreads can either be wide (high) or tight (low)
- Traders often favour tighter spreads, because it means the trade is more affordable
- If a market is very volatile and not very liquid, wide spreads may occur
- If a market has high liquidity but is not very volatile, tighter spreads may occur
- Factors like important news announcements or an event that causes higher market volatility can cause spreads to change
Why does the spread change in forex?
The spread in forex changes when the difference between the buy and sell price of a currency pair changes. This is called a variable spread – the opposite of a fixed spread. When trading forex, you will always deal with a variable spread.
The forex spread may increase if there is an important news announcement or an event that causes higher market volatility. One of the downsides of a variable spread is that, if the spread widens dramatically, your positions could be closed or you’ll be put on margin call. Keep an eye on our economic calendar to stay abreast of upcoming financial events.
How is the Spread in Forex Trading Measured?
The spread is usually measured in pips, which is the smallest unit of the price movement of a currency pair.
For most currency pairs, one pip is equal to 0.0001.
An example of a 1 pip spread for EUR/USD would be 1.0826/1.0827.
Currency pairs involving the Japanese yen are quoted to only 2 decimal places (unless there are fractional pips, then it’s 3 decimals).
What Types of Spreads are in Forex?
The type of spreads that you’ll see on a trading platform depends on the forex broker and how they make money.
There are two types of spreads:
- Fixed
- Variable (also known as “floating”)
For Fixed and Variable Spreads in Brief will discuss in next Part For that keep Follow our Forextrade1’s blog
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