Compare Forex Spread

forex spread

Every market has a spread and so does Forex. A spread is simply defined as the price difference between where a trader may purchase or sell an underlying
asset. Traders that are familiar with equities will synonymously call this the Bid: Ask spread.

Since the spread is just a number, we now need to know how to relate the spread into Dollars and Cents. The good news is if you can find the spread,
finding this figure is very mathematically straight forward once you have identified pip cost and the number of lots you are trading.

Remember, pip cost is exponential. This means you will need to multiply this value based off of the number of lots you are trading. As the size of your positions increase, so will the cost incurred from the spread.

It is important to remember that
spreads are variable meaning they will not always remain the same and will change sporadically. These changes are based off of liquidity, which may differ based off of market conditions and upcoming economic data. To reference current spread rates, always reference your trading platform.

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In the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms of their price in another currency. In order to express this information easily, currencies are always quoted in pairs (e.g. USD/JPY). The first currency is called the base currency and the second currency is called the counter or quote currency
(base/quote). For example, if it took JPY$116.944 to buy US$1, the expression USD/JPY would equal 116.944=1 The USD would be the base currency and the quotes would be the quote or counter currency.

Now that we know how currencies are quoted in the marketplace, let us look at how we can calculate their spread. Forex quotes are always provided with bid and ask prices, similar to what you see in the equity markets. The bid represents the price at which the forex market maker is willing to buy the base currency (USD in our example) in exchange for the counter currency (JPY). Conversely, the ask price is the price at which the forex market maker is willing to sell the base currency in exchange for the counter currency. Forex prices are always quoted using five numbers; so, for this example, let us say we had a USD/JPY today bid price of 116.944 and an ask of 116.949. Thus, the spread would be equal to 0.05, or $0.0005.

The bid-ask spread is simply the difference between the price at which a trader will buy a currency and the price at which the trader will sell a currency. In other words, the bid price is the price that the trader is willing to pay or Bid for a currency, while the Ask price is the price that the trader wants for a currency.


Compare EUR/USD Broker Spreads