The calculation of spread in forex is easy. Just by deducting the ask price from the bid price you get the current spread.

Generally, there are two types of spread, floating and fixed spreads. Floating spread means that it is changing constantly. while the fixed spread means, that it is always set to certain PIPs. Spread is different among brokers. Some brokers provide tighter while some other wider spreads. Generally, ECN brokers have tighter spreads, Market Makers have the widest, and STP brokers are in the middle.

Some brokers provide you services with different types of accounts, such as standard, Islamic, zero spread, and ECN accounts. Islamic account has the widest spreads, followed by the standard, ECN and Zero spread accounts. You can find the range of spreads on their websites. Time of the day also impacts the size of the spread. When many markets in the world are open, the spreads are narrower. On the other hand, when there are a few markets open, the spread is wider.

During the time that European Market and American markets are open, the spread is narrowest. The spread gets wider as the European markets are closed and gets wider when American Markets are also closed.

When there are many markets open, more traders are active, which competes in the market and pushes down the spread size. That is why the spread during rush hours is tighter. Most trading software provides you with a tab called Market Watch. You can check any moment spreads for all available symbols for trading. Zafari is a professional trader and has been in the financial market since He has a bachelor of public economics and an MBA.

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Sign me up for the newsletter! Our website is made possible by displaying online advertisements to our visitors. Please consider supporting us by disabling your ad blocker. What Is Spread in Forex? Completely Explained. What is Spread in Forex? Second, this is an example for one lot, so it is convenient to calculate.

Now, imagine that financial institutions open such positions. They make huge profits with virtually no risk. By the way, this position is one of the ways that banks earn by using depositors' money.

This position is opened while betting on the widening of the spread. You need to spot the moments when the difference in the asset values is the tightest and open a position expecting the spread to widen. Let us look at the right part of the chart above.

There is a situation when the prices for BRENT and the WTI are almost equal. There is an opportunity to make a profit from the spread widening. Here, we shall sell the cheaper asset and buy the more expensive one. So, the total position has made a profit of 4. As you see, the position bears almost no risk.

The only risk is time. Above, I wrote that, most commonly, the BRENT is more expensive than the WTI. In the opposite case, the position will be losing. In this case, you just hold the position on.

It should be noted that you can trade spreads using only closely correlated assets. You should not trade spread using assets from different sectors. In the above chart, in addition to the BID and ASK columns, there is the third one that shows the spread size for each trading asset.

You see, spreads are quite narrow for some instruments, about pips. For other assets, the spread size could reach or pips. There are several factors affecting the spread width. First of all, the spread is affected by the liquidity of the trading instrument. In simple terms, liquidity is the popularity of a trading instrument.

The more trades conducted with an asset, the more liquid it is. This is a key parameter to calculate the spread size. High liquidity always correlates to a tight spread. And vice versa, low liquidity corresponds to a wide spread. You can see from the above table that the popular currency pairs are always traded at a narrow spread. This is the law of stock trading.

Volatility also greatly affects the size of the spread. When volatility increases, the number of price fluctuations increases, which means that the spread will widen. When volatility declines and price changes occur less often, the spread will narrow. Thus, the spread in the foreign exchange market is an indicator of volatility. Everyone knows examples when, at the time of publication of important fundamental news, volatility increased sharply, and the spread also increased.

The highest volatility was featured by the USD RUB currency pair. And in some banks, the difference between offer and demand prices reached Another part of the spread is the interest of the intermediary, that is, a broker or dealer. The intermediary sets the broker spread, but without going beyond. Each broker offers its own spread, but in the end, they will be about the same, because the share of the broker in the spread is not so high.

Unpopular brokers set a higher spread, while popular ones, on the contrary, try to reduce it as much as possible in order to attract new customers. There is no great need to calculate the spread in points since it is almost always indicated in your terminal or mobile application. And here's how to convert this spread in points into dollars or euros.

The picture above is a screenshot from the mobile application of my LiteFinance broker. There are two prices in the transaction window, the buying price and the selling price. As we have already found out, these are Bid and Ask prices. Now we need to convert the pip spread into money.

I use the account currency, US dollars, so we will need to convert the pips to dollars. In my example, I decided to enter a trade with a volume of 1 lot. For a volume of 1 lot, the formula for calculating spread will look like this: 1. In my case, it will be equal to 0. If you want to calculate the spread cost for a different trade volume, you need to change the number of currency units.

For example, for 0. Of course, you can calculate the spread manually, but trading has advanced quite far and every self-respecting broker has long been providing the service of a trader's calculator, which will calculate the spread and other transaction parameters for you in real-time.

Going back to the spread concept, I want to stress that the buy spread and sell spread are a bit different. When you buy you pay the spread when you enter a trade and when you sell you pay the spread when you exit the trade. Well, now you know how to calculate spread.

Let me explain how to quickly learn the spread in a trading terminal and not to waste time on manual сalculation. I will start with the MetaTrader 4 trading terminal. When you want to enter a trade in the Metatrader terminal, you need to set parameters for the future transaction in the trade window.

In the same window, you see the selling price and the buying price. If you compare these two prices in the above example, you will see that the difference between the values is just two pips, 1.

It means that the spread at the time of entering a trade is less than a point, 0. This is a very narrow spread, which is, by the way, normal for this broker. This tab displays the buying and selling prices, and the spread value in a separate field.

In this example, the spread is even tighter, 1 pip. Supposing, we want to enter a EURUSD buy trade. The price of the currency pair is 1. The difference of 1 pip is the difference between buying and selling prices. As we want to buy, someone should sell. The seller is in the foreign exchange, and its selling price is 1.

At this price, the trade will be entered, although the last price in the chart will be 1. This is because we pay the price appointed by the seller. After a while, the price rises and we decide to exit the trade. So, we are going to sell the asset we bought earlier.

The buyer sets the price of 1. Thus, summing up all these prices, we see that the price covered the distance between 1. But we made a profit from the distance between 1. Two missing pips are the spread. As I said, the spread is the difference between the buy price and the sell price.

The above chart shows that these prices are currently the same, and the spread is 0. This is possible only on the ECN accounts. If you are lucky to enter a trade at such a moment you will enter a zero spread forex trade. But do not forget that you will have to pay a commission for the transaction execution. For major trading instruments, the spread is always expressed in pips. To find out the cost of the spread in the currency of your transaction, you need to convert the pips into money.

It is easy if you know the pip value. In the above chart, the spread is one pip. To calculate the cost of the spread we also need the trade volume. As an example, I will use the standard trade volume of one lot. With a standard volume on the GBPUSD currency pair, the cost of one pip is 1 USD. And since our spread is 1 pip, it will cost 1 USD. Thus, entering a trade with the contract size of one lot, we will pay the spread of 1 USD, which will be charged at the moment of opening the position.

It means that at the moment of opening the trade, we will immediately lose 1 USD, the amount of the spread. So, we should earn at least the amount of spread to break even.

Fixed spreads are normally determined by a dealing company for micro- and mini-accounts that are served automatically. It is the spread whose size is changing, depending on the market situation. The variable spreads are close to the conditions of the real interbank market.

However, a floating spread weakens the performance of some trading strategies and makes strategy testing much more difficult. A fixed spread is determined by the broker. In most cases, a fixed spread is a favourable factor for a trader, but its value is usually higher than a raw market spread.

There are rather few forex brokers offering a fixed spread. The floating spread has become so popular that it has almost completely replaced the fixed spread.

There are hardly any advantages in trading with a fixed spread. That is why this type of spread can entirely disappear.

No slippage. The slippages are often talked about and most beginner traders are really afraid of a slippage. In fact, this is a market feature that can be avoided on fixed spread accounts. In other words, the broker will always execute your contract in full, which will avert price slippage. I suppose everyone has witnessed a situation when the spread for a trading instrument sharply widened due to an important news release in the economic calendar.

This is the biggest flaw of the floating spread. But the fixed spreads are not affected by anything, as a broker has set a fixed range for the spread. You always know the spread size. Traders often used automated systems, robots, and scripts, in the forex market. These systems are based on algorithms, and these algorithms are easy to build when you know the spread in advance. You can always take it into account when setting up order triggering and in the final result.

It's hard to find a broker. In the modern forex market, where the leading roles have taken over ECN accounts with NDD order execution technology, that is, without the participation of a broker, it is very difficult to find a broker providing accounts with fixed spreads. Fixed spreads can usually be applied to cent accounts, which are less and less popular.

The fixed spreads are usually rather big. If the broker provides fixed spreads, it must take into account the volatility, its own profit, and the profit of the exchange. For example, I entered a EURUSD trade with a fixed spread of 20 pips.

To compare, the current floating spread for this currency pair is about 0. The choice is obvious. Requotes on the Instant Execution account types. There are several types of trading order execution modes. One of the most popular is the Instant Execution mode. If you apply the Instant Execution mode and the spread is fixed, you cannot avoid requotes. For scalpers, this is even more dangerous than slippage, because a scalper can destroy the entire system due to one failed order.

Floating spread is the most common type of spread nowadays. It is popular because it is profitable for all parties taking part in the transaction. Brokers and dealers can regulate and adjust it fast to changing market conditions, which allows solving 2 problems at a time: provide clients with higher-quality services and earn at the moments when the spread increases.

The Triangle pattern in forex trading is a time-sensitive chart pattern that shows a tightening range due to market indecisiveness. Fibonacci strategy in forex trading is an attempt to profit by trading from the key price levels by using the Fibonacci sequence. Deciding to trade forex or crypto currencies depends largely on a few important factors, including risk versus reward tolerance, a willingness to speculate and knowledge of how to trade both.

Risk tolerance and trading styles will likely determine whether forex or stock trading is the best option for you: short-term traders generally gravitate to forex markets while long-term traders move into stocks. Forex risk management is a process of identifying, assessing, and controlling the threats that arise from foreign exchange speculation.

The forex market is open 24 hours a day from 5 p. EST on Sunday to 5 p. EST on Friday to allow for traders in different time zones around the world to buy and sell currency pairs. A flag pattern is a candlestick formation that forms after a sharp move, followed by a rectangular consolidation that looks like a flag on the pole.

The top 5 forex indicators are Moving Averages, Relative Strength Index, Fibonacci retracements, Bollinger Bands, and Average True Range. The top 5 forex trading strategies are: trend following, scalping, swing trading, price action trading and position trading.

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To better understand the forex spread and how it affects you, you must understand the general structure of any forex trade. One way of looking at the trade structure is that all trades are conducted through intermediaries who charge for their services. This charge—which is the trade's difference between the bidding and the asking price—is called the "spread.

The forex spread represents two prices: the buying bid price for a given currency pair, and the selling ask price. Traders pay a certain price to buy the currency and have to sell it for less if they want to sell back it right away. For a simple analogy, consider that when you purchase a brand-new car, you pay the market price for it.

The minute you drive it off the lot, the car depreciates, and if you wanted to turn around and sell it right back to the dealer, you would have to take less money for it. Depreciation accounts for the difference in the car example, while the dealer's profit accounts for the difference in a forex trade.

The forex market differs from the New York Stock Exchange , where trading historically took place in a physical space. The forex market has always been virtual and functions more like the over-the-counter market for smaller stocks, where trades are facilitated by specialists called "market makers. The buyer may be in London, and the seller may be in Tokyo—an intermediary is needed to coordinate the transaction.

The specialist, one of several who facilitates a particular currency trade, may even be in a third city. His responsibilities are to assure an orderly flow of buy and sell orders for those currencies, which involves finding a seller for every buyer and vice versa. In practice, the specialist's work involves some degree of risk. It can happen, for example, that they accept a bid or buy order at a given price, but before finding a seller, the currency's value increases.

The specialist is still responsible for filling the accepted buy order and may have to accept a higher sell order than the buy order they have committed to filling. In most cases, the change in value will be slight, and the market maker will still make a profit. As a result of accepting the risk and facilitating the trade, the market maker retains a part of every trade. The portion they keep is called the "spread.

Every forex trade involves two currencies called a currency pair. This example uses the British Pound GBP and the U. Suppose that, at a given time, the GBP is worth 1. The asking price for the currency pair won't exactly be 1. It will be a little more, perhaps 1. Meanwhile, the seller on the other side of the trade won't receive the full 1. They will get a little less, perhaps 1.

The difference between the bid and ask prices—in this instance, 0. The spread may not seem like much, but. The facilitator can assist in thousands of these trades per day. Using the example above, the spread of 0. Currency trades in forex typically involve larger amounts of money.

The 0. You have two ways of minimizing the cost of these spreads:. Trade only during the most favorable trading hours , when many buyers and sellers are in the market. As the number of buyers and sellers for a given currency pair increases, competition and demand for the business increase, and market makers often narrow their spreads to capture it. Avoid buying or selling thinly traded currencies.

If you trade a thinly traded currency pair, there may be only a few market makers to accept the trade. Reflecting on the lessened competition, they will maintain a wider spread. You can watch the most liquid forex parings to get a sense of what a good spread is in forex. You might compare those pairings' spreads to other pairings. It might also help to compare the spreads between brokerages to ensure you're getting the best deal.

High spreads suggest that a pairing is less liquid than other pairs. In other words, fewer traders and fewer dollars are focusing on the pair. The fewer traders focusing on a pair, the less likely it is that someone is willing to offer a price that's closer to the opposing side of the trade.

When trading happens less frequently, the spread increases. Brokerages may also include trading fees in the spread, even if it markets itself as a "commission-free" trading platform. Securities and Exchange Commission.

Accessed Dec. In This Article View All. In This Article. The Bid-Ask Spread Defined. Forex Market Makers Determine the Spread. A Sample Calculation. The Cost of the Spread. How to Manage and Minimize the Spread.

Frequently Asked Questions FAQs. Key Takeaways TA forex spread is determined when a facilitator finds a buyer and seller for a pair and adjusts the price slightly on each side. The spread is a transaction fee paid to the facilitator for their services. It is often lower at busy trading times. Note In most cases, the change in value will be slight, and the market maker will still make a profit. Note The spread may not seem like much, but.

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But you need to take into account a lot of factors. You can see variable spreads in real-time on the online platform. The highest volatility was featured by the USD RUB currency pair. Moreover, my broker LiteFinance provides a spread as close to raw as possible and in recent years I have not taken it into account at all in my strategy, since it is very small. It does not store any personal data. The forex market has always been virtual and functions more like the over-the-counter market for smaller stocks, where trades are facilitated by specialists called "market makers. Deciding to trade forex or crypto currencies depends largely on a few important factors, including risk versus reward tolerance, a willingness to speculate and knowledge of how to trade both.

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