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10. What is a Spread in Forex?

In our choosing a forex broker lesson, we discussed how it is important that you check the spreads of your broker before registering with them. In this lesson, we will discuss at length what is a spread in forex and why spreads are important to consider.

Learn the Equation of Spread in Forex?

A spread is a difference between the “ask” and the “bid” prices of a broker’s currency quote. The bid is the price you can sell the base currency and the ask is the price you can buy the base currency.

Spread = ask price – bid price

What’s the Importance of Spread?

Spreads are normally collected by no commission broker as a fee for executing an order. Instead of charging you a separate fee for each trade, brokers include the cost within the buy and sell prices of the currency pair you’re trading. This way, when you buy a currency, you pay a slightly higher price, and when you sell, you receive a slightly lower price.

From the broker’s perspective, they’re providing you with a service, and they need to make money somehow. They do this by selling you the currency at a slightly higher price than they paid for it, and vice versa when they buy it back from you.

So, whenever you engage in forex trading, you’re paying a small fee, represented by the spread.

How to Calculate Spread?

Spread is always measured in pips. For example, a 2 pip spread for EURUSD would be

Ask Price – Bid Price
1.2083 – 1.2081 = 2 Pips

In this quote, you can buy EURUSD at 1.24378 and sell it at 1.24367. The spread right now is (1.24378-1.24367)= 0.00011 or 1.1 pips. That means if you buy EURUSD now and close it right away, then you will lose 1.1 pips.

Let’s assume, you are trading with 7 mini lots, so 1.1 pips (spread) x 7 mini lots (your lot size) x $1 (pip value per mini lot) = $7.7

Types of Spread

There are two types of spread available depending on your forex broker.

types of spread depicted on the feature photo

01. Fixed Spread:

The fixed spread remains the same regardless of the market conditions. This is usually offered by market-making brokers.

02. Variable Spread:

Variable spreads mean that they are constantly changing. Variable spreads are offered by non-dealing desk brokers. As they receive prices from several liquidity providers, the spread usually widens based on the supply-demand of currencies and market volatility.

For example, you saw the spread of EURUSD is 2 pips, however, when you went to buy EURUSD during the FOMC news release, the spread increased to 20 pips!

03. Raw Spread:

Raw spreads are simply the difference between the buying and selling prices of a currency pair, without any extra fees added. Traders using raw spread accounts get direct access to the interbank market, which means they can get better prices and lower costs.

04. Zero Spread:

Zero spreads are fixed at 0 pips, meaning traders don’t pay any spread cost regardless of market conditions. Zero-spread accounts, like ECN-based accounts, link traders directly to liquidity providers. Unlike raw spreads, zero spreads usually involve a fixed commission per trade, typically ranging from 0.2 to 3.5 pips based on the trading instrument and your forex broker.

This is what you learned today-

  • Spread is called the difference between Bid & Ask Price
  • Spread is a way to make money for your forex broker.
  • Types of spreads available in forex.

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