What is Spread in Forex?

Spread in Forex is the difference between the bid price and ask price. The Spread cost is measured in 'pips' and is the cost of trading. Popular currency pairs such as the EUR/GBP and USD/AUD have lower spreads as a result of higher levels of liquidity. An in-depth explanation can be found in our Beginner's Guide To Forex Trading.

How is Spread Calculated in the Forex Market?

The bid/ask spread is calculated by subtracting the bid price (sell) from the ask price (buy). For instance, the EUR/AUD is quoted as 1.6162/1.6163. Simply subtract the bid price (1.6162) from the ask price (1.6163) to determine the spread. 1.6163-1.6162 = 0.0001 In this example, the cost of trading is 0.0001 or 1 pip. This is considered an extremely low spread. To determine the total spread cost, you must multiple the pip cost by the total amount of lots traded. If trading a 10k EUR/AUD lot, you would incur a total cost of: 0.0001 x 10,000 (10k lot) = $1 For more complex calculations involving margin, use FP Markets Forex Calculator.

What Does a Forex Spread Tell Traders?

The spread of a given currency pair reveals information about market conditions such as time, volatility and liquidity. Emerging currency pairs have a greater spread than major currency pairs. There are 8 major currencies which account for approximately 85% of the forex market turnover. With more market makers, real-time pricing and higher trade volumes, pairs involving major currencies have lower spreads. In addition, there are peak trading times for particular currencies. For instance, the cost of trading the AUD will be higher when it is night time in Australia. This is as there are not as many market participants actively trading at this time. Similarly, other Australian financial markets that may influence forex are also closed at this time.

How much is 10 pips worth?

A pip is the unit of measure a trader uses for the smallest value changes in a currency pair’s exchange rate. In forex trading, can also be used to reference profits or losses since a pip’s value can differ according to the leverage a trader uses. The standard Lot size is 100,000 units. Units referred to the base currency (EUR). Therefore 1 Lot or 100,000 units worth 100,000 EURs. For instance, if the EUR/USD moves by ten pips, from 1.11596 to 1.11696, 10 pips would be worth 8.96 (EUR).

How does spread affect profit?

The spread affects profit given that a currency pair reveals information about market conditions such as time, volatility and liquidity. For instance, emerging currency pairs have a greater spread than major currency pairs. Currency pairs involving major currencies have lower spreads. Traders should also consider peak trading times for particular currencies. For instance, the cost of trading the Australian Dollar (AUD) will be higher during nighttime in Australia. This is as there are not as many market participants actively trading at this time. Similarly, other Australian financial markets that may influence forex are also closed at this time. A wider currency pair spread means that a trader would pay more when buying and receive less when selling.

What is low spread in forex?

Low spread in forex is the difference between the bid and the ask price. Traders prefer to place their traders when spreads are low like during the major forex sessions. Spreads are likely to be low when volatility is low and liquidity is high. When there is a bigger difference between the bid price (buy) and the ask price (sell), it means that traders are likely to spend more on wider spreads because of high volatility and lower market liquidity.