What is Spread in Forex?

The difference between the ask and Bid price is called spread in forex. Here, we can always see the two prices in the currency pair, the bid price and the ask price. The bid price is the price at which we can sell the base currency, and the ask price is the price at which we can buy the base currency. The spread in forex is usually expressed in pips (percentage in point). The spread is the trader’s initial loss and the broker’s commission.

In the foreign exchange market, most forex currency pairs are traded without commissions, but spreads are a cost applies to any transaction we trade. The size of the spread in forex may be affected by different factors. During periods of market inactivity, the spread may be lower, but during periods of market volatility, the size of the spread may expand sharply.

How to Calculate Spread In Forex

We can easily calculate the spread of any currency pair. For example, if the bid price of the EUR/USD currency pair is 1.2413 and the ask price is 1.2314, then the spread = buy-ask = 1.2413-1.2414 = 0.0001 USD or 1 pip.

Types of a Spread

The types of spreads we can see on the trading platform depend on the foreign exchange broker. Some forex brokers charge low spread and some charge wider spread. There are two main spread in forex, namely fixed spread and variable spread.

Fixed spread

A fixed spread in forex is the constant value of a currency pair. In fixed spreads, even if the market fluctuates highly, the spread will not be affected. The value of the spread remains unchanged. Fixed spreads allow traders to rely on strategies without worrying about unexpected variables.

Fixed spreads are the best choice for beginners who are unable to invest a lot of money in this market. Regardless of market conditions, it can help traders understand their spread costs.

Variable spread

variable spreads are always changing with market conditions. Generally, variable spread is low during times of inactive market, but during the volatile market the spread increases.

For example, you may want to buy USD/JPY with a spread of 1 pip, but just when you’re about to click buy, the any high impact news may released from united stats or japan then the spread rapidly widens to 10 pips.

Advice

We should always choose brokers that provide low spread. Entering a foreign exchange transaction with a low spread means that your overall position will be slightly better. Therefore, we should choose the best forex  broker that provides the lowest spread.