What is a Spread in Forex ?
A spread is a cost built into the buying and the selling price of all the currency pairs. In most cases, Forex spreads depend on your Forex broker. The spread is the primary cost of trading currencies. This article will discuss what Forex spreads are, how to calculate them, and the best ways to use them.
What is a Forex spread?
A Forex spread is the price difference between the buying and selling of a currency pair. The size of the spread depends on factors like the market’s volatility and the currency pairs you wish to trade. In a volatile market, spreads are usually wider. Thus, increasing your cost of transactions. Most Forex traders offer two types of trading accounts, depending on the size of the spread:
Standard no-commission account Brokers do not charge traders for commission, and traders keep all the profits that they make from a trade. This is possible as the cost for trading is included in the spread. Direct account with commissionsTraders have access to raw spreads. These are lower since there is no extra cost added to the spread. Instead, traders need to pay a base commission fee to brokers.
Spreads are always measured in pips. It is derived by subtracting the last two decimal positions of the Bid and Ask prices.
A high spread refers to a large difference between the ask and bid price of the currency pair. Currency pairs of emerging markets and economies have a high spread as compared to major currency pairs. Meanwhile, a low spread refers to a small difference between the currency pair’s ask price and bid price.
How to calculate spreads in Forex trading.
Using EUR/GBP as an example, your broker quotes your position at 1.1800/1.1802, making the spread equal to 2 pips (1.1802–1.1800=0.0002). If you buy EUR/GBP at 1.1802 and immediately sell it back to your broker, you get a bid price of 1.1800 for the same. Therefore, The speculative trade cost for this position comes down to $0.0002—assuming you only traded a single unit of the EUR/GBP. As currencies are traded in lots, the actual cost involved in a trade position of 10,000 would be equal to 0.0002*10,000 =$20 (spread*total lot size). A higher traded lot would mean a higher cost involved.
Analyse spreads carefully to improve your trading strategy.
Knowing what factors cause Forex spreads to widen can directly help you make profitable trades. Blueberry Markets makes trading easier for new and experienced traders by offering raw spreads with our Direct account, and tight spreads with built-in costs with our Standard account. Open an account now to trade with spreads from as low as 0.0 pips.