Every Forex trader needs to understand the concept of spread since it stands as one of the basic principles of forex trading. The spread means the gap between the buying and selling price quotes for any forex currency pair.
This article provides insight about the spread in Forex trading by explaining its meaning and calculation while demonstrating its importance for traders when selecting brokers.
What Does Spread Mean in Forex Trading?
The spread in the forex market defines the price gap between the purchase price and the sale price of a currency pair. Brokers impose transaction charges on traders which constitute the spread when they facilitate a trade.
The spread functions as the fee that brokers receive for their intermediary role in transactions.
A real-world example of how spreads work is the process of currency exchange at a bank before an international trip.
The exchange rate for buying your domestic currency at the bank differs from their rate for selling foreign currency to you. The bank earns transaction profits through this price difference known as the spread.
Similarly, in forex trading, brokers provide two prices for each currency pair: the bid and the ask. The base currency sells at the bid price while the base currency purchases occur at the ask price. The spread represents the difference between the bid price and the ask price.
The difference between the bid price of 1.1390 and the ask price of 1.1392 for the EUR/USD pair results in a spread of 0.0002 or two pips.
A pip represents the smallest possible price change in a currency pair which equals 0.0001 for most major currency pairs but equals 0.01 for pairs involving Japanese Yen.
"Zero commission" brokers generate their profits through the spread between currency prices. The trading cost for each operation is included in the currency pair's purchase and selling prices rather than being charged as a separate commission fee.
Since the cost of executing a trade is embedded within the bid-ask spread, people frequently use the terms "transaction cost" and "bid-ask spread" interchangeably.
What is Bid-Ask Spread in Forex Trading?
The bid-ask spread serves as the critical foundation of forex pricing mechanisms. The range of prices at which a forex broker agrees to purchase (bid) and sell (ask) a particular currency pair defines this concept.
The spread between bid and ask prices accurately depicts current currency supply and demand levels together with market volatility alongside the broker's profit margin.
- Bid Price: The maximum price a market participant (the broker) agrees to pay when purchasing a currency represents the bid price. The base currency's selling price matches the bid price.
- Ask Price: The ask price represents the minimum amount that a broker will accept when selling a currency. The price you must pay stands as the amount you will pay for the base currency.
The bid-ask spread represents the cost required to execute a trade. Your profitability depends directly on this factor because it serves as a critical component to assess. When the spread increases you must generate more profit to pay for the initial trade cost.
BlueSuisse allows users to monitor real-time bid-ask spreads for each currency pair through live streaming prices available on MetaTrader 4 and MetaTrader 5 platforms.
You can always monitor the best prices available for trading at any specific time through this feature.
Create your demo account from BlueSuisse to apply Spread in your forex trading strategies and perform your own forex market analysis.
What are Spreads in Forex Trading?
The forex spread remains dynamic because it changes based on elements such as the traded currency pair, market volatility levels, and the broker type.
There exist two primary spread categories in trading which are fixed spreads and variable spreads.
- Fixed Spreads: Market conditions do not affect these spreads as they stay constant throughout. Brokers who provide fixed spreads operate as market makers by opposing your trades. Fixed spreads provide stable pricing but may result in requests during high market volatility when brokers block trades and require acceptance of an updated price.
- Variable Spreads: Floating spreads change according to the current market conditions. Brokers who operate without dealing desks provide these spreads by obtaining pricing data from many different liquidity sources. Variable spreads expand during the release of economic information and times when market liquidity drops but they provide clearer pricing and avoid requotes.
Your forex trading strategy and risk management approach combined with your level of market knowledge determine whether fixed or variable spreads are more suitable for you.
Beginner forex traders who make infrequent trades often choose fixed spreads for their stable pricing but larger account traders who engage heavily during peak market times can take advantage of the narrower spreads offered by variable spread brokers.
BlueSuisse delivers market leadership through its distinctive transparent trading approach which ensures optimal price execution for all trades. Through transparency BlueSuisse traders receive competitive spreads and a fair market environment.
BlueSuisse offers several trading platforms like MetaTrader 4, MetaTrader 5 and TradeMaster which have been designed to deliver an optimal trading experience.
How to Calculate Spreads in Forex trading?
The process of determining the spread in forex trading remains simple and direct. The spread calculation requires you to take the bid price and subtract it from the ask price.
The pip difference between ask and bid prices represents the trading cost.
Spread = Ask Price - Bid Price
Let's look at a few examples:
- EUR/USD: The difference between a bid price of 1.1390 and an ask price of 1.1392 results in a spread of 0.0002 which equals 2 pips.
- USD/JPY: When the bid price stands at 142.36 and the ask price at 142.40 the difference calculates to 142.40 minus 142.36 which equals 0.04 or 4 pips.
- GBP/USD: The difference between the ask price of 1.3305 and the bid price of 1.3300 equals 0.0005 which translates to a 5 pip spread.
The magnitude of the spread plays a critical role in determining your trading profits especially if you engage in high-frequency trading or scalping. Monitoring and incorporating your broker's spreads into your trading strategy remains a fundamental requirement.
Traders operating in the forex market must learn about spreads because they represent an unavoidable aspect of trading activities.
Trading spreads involve simple calculations but their actual size depends on market liquidity, volatility levels and broker fees.
Traders who select BlueSuisse as their broker gain access to competitive spreads, powerful trading platforms and risk management tools that help maximize trading opportunities while minimizing expenses.
The combination of BlueSuisse's extensive experience and regulatory compliance with custom daily analysis gives traders an advantage.
This guide should have clarified the fundamental principles about spreads along with their effects on forex trading. Begin profiting from the markets with BlueSuisse's low spreads by registering for a live account today.
Our friendly team remains available to guide you throughout the straightforward registration procedure and all subsequent stages.