What is Spread?

You’re now informed about the significant function a pip has on behalf of forex trading and how you can calculate the value of a pip. Finally there still remains the spread which should definitely be taken into account. The spread is the difference between the bid and the ask price.

It’s evident that the forex brokers also have to make some money out of the transactions which they take care of and they are doing such by means of the spread. The spread is the difference between the bid and the ask price.

The bid and the ask price

When you log in on the online trading platform of your forex broker, you’ll always see each currency pair having two prices.

forex spreadAs you can see the bid price is lower than the ask price, the difference between these two prices being 0,0003. This price difference is called the spread, in this case amounting to 3 pips.

The bid and the ask price:

  • The bid price is the price at which the broker offers you to sell the base currency.
  • The ask price is the price at which the broker offers you to buy the base currency.

On the illustration this is being clearly specified by means of the indications Sell and Buy.

How does a forex broker calculates the spread?

Normally a forex broker uses to calculate the spread immediately when opening a position. If for instance the spread amounts to 3 pips, the price consequently first has to go into the right direction with 3 pips before reaching the breakeven point. Only after this has been realized, you might be able to make a profit.

The spread which has to be paid differs per currency pair

The spread which has to be paid differs per currency pair. Generally speaking the spread of currency pairs which are frequently traded by forex traders, will consequently be considerably lower.

The standard spread which is calculated for the most common currency pairs amounts from three to four pips. In that case you’ll already dispose of 10 currency pairs to go trading with. Of course you could trade even more currency pairs, but that involves that the spread should be amounting to at least 5 pips with a possible addition up to 17 pips or even more dependent on the extent of the exotic nature of the currency pairs.

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Related Posts:

  1. What is a Pip?
  2. The value of a pip

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