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 commissions.
  Traders 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.

Analyze carefully to improve your trading strategy

Knowing what factors cause Forex spreads to widen can directly help you make profitable trades. Blueberry 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.

Frequently Asked Questions

 

What is a good spread in Forex?

A good spread starts between zero to five pips, benefitting both the broker and the trader.

The volatility 10 index represents low volatility in the market, which means low VIX. This also shows that there is increased certainty, economic stability, and low investor fear.

 

What is pip spread in Forex?

Currency pairs in the Forex market are quoted in terms of pips, which is one-hundredth of 1% or 0.0001.

 

What is the best spread in Forex?

The best spread in Forex is 0.0 spread, which means that there is no difference between the buying price and selling price. Hence, if you buy a currency pair and sell it immediately, you are at no loss.

 

What is spread betting in Forex?

Spread betting is a Forex trading strategy where participants do not own any currency pairs they trade. Instead, spread bettors speculate on whether the currency pair prices will increase or decrease based on a broker’s prices.