Stocks Market

What Is A Spread in Forex and How To Calculate It?

When you begin your journey in the forex market, you should have a thorough knowledge of various technical terms. It is essential to understand the new words in forex trading. To start trading in the forex market, you must finalize a reliable forex broker. You can get an idea about top forex brokers through credible forex-related websites. Then you can compare forex brokers online. You can get valuable information about the technical and other aspects from leading B2B forex platforms. This article looks at the significance of spread in forex trade and the various steps to calculate it.

Spread in Forex,
Spread in Forex –

Understanding Spread

A spread is the difference between a currency pair’s selling price and buying price. When you start trading in forex, you understand two costs for a currency pair. It is known as the bid price and an ask price. Traders use bid prices when they sell the base currency.

On the other hand, traders opt for the asking price when buying the base currency. Spread is a constant feature in all transactions, but you can trade currency pairs without commission. The calculation of your total cost in a transaction depends on spread and lot size.

Major Forex Pairs

Some of the major forex pairs in trading are EUR/USD: Euro and US dollar, USD/JPY: US dollar and Japanese yen, GBP/USD: British pound and US dollar, and USD/CHF: US dollar and Swiss franc.

Pip Spread

The traders measure spread in pips or price interest points. They are the last decimal point on the price quote. There are chances of low liquidity and high volatility when there is a broader spread. Similarly, low volatility and high liquidity cases will increase with a lower spread. The spread can be variable or fixed, and both have their advantages and disadvantages.  

Calculating Spread

Firstly, one must identify the difference between pips’ buy and selling price. You will get this by subtracting the bid price from the asking price. For instance, if you are trading GBP/USD at 1.3094/1.3098, you can get the spread by calling the difference of 1.3098 – 1.3094.

High or Low

The nature of spreads can be high or low. In trade circles, it is called wide or tight. Traders are happy with tighter spreads because they can afford it. The nature of spreads depends upon various factors, including the market trend for a particular day. Based on the market mood, spreads can be wide or tight. Depending on the market’s volatility, the spreads can also be wide. Almost all major currency pairs have a tighter spread, but emerging market currency pairs tend to show wide spreads, depending upon various factors, including news developments.

Influencing Factors

Many factors affect a forex spread. External factors, especially breaking news, can adversely affect the market. Similarly, the GDP announcement of significant economies, interest rate figures, inflation numbers, job data, etc., can create fluctuation in the market and affect the forex spread.

Significance of Charts

All investors need to have a proper plan to operate in the forex market. Besides having a thorough knowledge of the nature of the market, they should also conduct fundamental, technical, and weekend analyses to understand the performance of the market. Once you properly analyze your movements and trade decisions in the market every week, you know where you went wrong and what worked in your favor.

Based on such a study, you can make corrections in your strategy and prepare better for the next week’s trading. It is also helpful for an investor to have a trade journal to note major trading decisions in his career. By studying your trade journal, you can gauge the market mood and predict the possibility of wider spreads in the future.

But you have to realize that all your calculations and predictions can go wrong. Investors should understand the nature of the market, and they can’t do much about it rather than focusing on their next trade. With the evolution of technology, some trade platforms can predict the market mood using effective charts.

Understanding the Market

As a beginner in the market, one of the main objectives should be to learn more about trading by reading forex-related websites and financial publications. An investor needs to update with the latest news to impact the market. Based on the current information related to the economy, you can take a call on your buy or sell decision.

It is also significant for new investors to begin trading with a demo account. Once they gain confidence in their abilities and adequately understand the market, they can start a live account. You have to realize that forex trading is a very volatile market and one has to approach it very cautiously to make gains.

Leave a Comment