What is spread in Forex trading? Before going straight to the description of spread, we want to have a focus on bid and ask price in Forex trading. You need to know what are bid and ask prices to have a better understanding of what is spread in Forex trading?
What are Bid and Ask prices?
All Forex Trading currency pairs quotes have a bid and ask price. Bid price is the current price at the market and ask price is the price set at the broker platform based on which your trade will be executed.
EUR/USD currency pair would appear as EUR/USD = 1.4888/1.4890.
Bid Price: The figure on the left side, i.e. the number 1.4888 is the bid price. It means you can sell 1 Euro for $1.4888
Ask Price: The other number on the right side of the EUR/USD currency quote i.e. 1.4890 is called the ask price. It means you can buy 1 Euro for $1.4890.
It is important to remember that the bid price is always lower than the ask price.
What is spread in Forex trading?
Spread is perhaps the simplest term in Forex trading in terms of ease of understanding. Just recall the previous example cited above, every currency pair has bid and ask prices, and you have seen that the bid price is always lower than the ask price. Here, Spread = Ask price – Bid price, that means, the difference between bid and ask price is called the spread.
EURUSD = 1.4888/1.4890
1.4890 – 1.4888 = 0.0002 (1 pip)
Can you find the difference between the bid and the ask price? Here, this difference of 1 pip is called the spread. In other words, the spread is the difference between the highest price the buyer is willing to buy the currency and the lowest price the seller is willing to set it. For instance if you assume the bid price is $1 and the ask price is $1.3 then the spread would be $0.3.
The bottom line:
What is spread in Forex trading?
How is spread calculated when trading in the Forex market?
Forex markets traders has to trade one currency for another. Therefore, Forex trading currencies are quoted in terms of their price in another currency. To express this information simply, currencies are always quoted in pairs (e.g. USD/CAD). The left side currency is called the base currency and the right side currency is called the counter or quote currency (base/quote).
As we have discussed how currencies are quoted in the marketplace, let us have a look at how we can calculate spread. Remember, Forex quotes are always provided with bid and ask prices, similar to what you see in the equity markets. The bid represents the price at which the Forex market maker is willing to buy the base currency (USD in our example) in exchange for the counter currency (CAD). On the other hand, the ask price is the price at which the Forex market maker is willing to sell the base currency in exchange for the counter currency. Forex prices are always quoted using five numbers; so, for this example, let’s say we had a USD/CAD bid price of 120.00 and an ask of 120.05. Thus, the spread would be equal to 0.05, or $0.0005.
|Chapter 2||Forex Trading Basics|
|Lesson 1||Forex trading Currency pairs|
|Lesson 2||What is pip|
|Lesson 3||what is spread in forex trading|
|Lesson 4.||What is leverage in Forex|
|Lesson 5||Forex Trading Order Types|
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