Calculating forex spread has a lot of benefits for forex traders of all levels. Generally in forex spread is simply defined as the price difference between where a trader may purchase or sell an underlying asset. A spread can also be defined as the difference between the bid and the ask price of a security or asset. Calculating forex spread guides the investor on how to trade in other to maximize profit.
WHAT DOES A SPREAD TELL TRADERS?
Spreads are based off the Buy and Sell price of a currency pair.
Costs are based off of spreads and lot size.
Spreads are variable and should be referenced from your trading software.
HOW SPREAD IS CALCULATED WHEN TRADING IN THE FOREX MARKET
First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms of their price in another currency. In order for this information to be easily expressed, currencies are always quoted in pairs. The first currency is called the base and then the second currency is called the counter. Let’s now look at how we can calculate their spread forex quotes are always provided with bid and ask prices. The bid represents the price at which the maker is willing to buy the base currency (USD in our example) in exchange for the counter currency (CAD).the ask price is the price which the forex market maker is willing to sell the base currency in exchange for the counter currency. Forex prices are quoted using 5 numbers; so, for this example, let's say we had a USD/CAD bid price of 140.00 and an ask price of 140.05. Thus, the spread would be equal to 0.05, or $0.0005.
SPREADS COSTS AND CALCULATION
Since the spread is just a number, we now need to know how to relate the spread into Dollars and Cents. The good news here is that if you can actually find the spread, finding this figure is very mathematically straight forward and simple once you have identified pip cost and the number of lots you are trading.
Using the quotes above, we know we can currently buy the EURUSD at 1.3566 and close the transaction at a sell price of 1.35476.That means as soon as our trade is open, a trader would incur 1.6 pips of spread. In order to indentify the total cost, we will now need to multiply this value by pip cost while considering the total amount of lots traded. When trading a 10k (EURUSD) lot with a $1 pip cost, you would bring upon yourself a total cost of $1.40 on this transaction.
Remember, pip cost is exponential. And this means you will need to multiply this value based off of the number of lots you are trading. As the amount of your positions enlarge, so will the cost incurred from the spread.
CHANGES IN THE SPREAD
It is very essential to remember that spreads are variable which means they will not always remain the same and will change periodically. The changes here are based off of liquidity; it may differ based off of market conditions and upcoming economic data. To position current spread rates, always reference your trading platform.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.