Understand 
Fx Spread

A quote consists of a buy price which is the offer and a sell price which is the bid. The difference between the two prices is referred to as the spread. High volume pairs like the EUR/USD will typically have tighter spreads than other pairs that don't generate as much trading volume

A quote consists of a buy price which is the offer and a sell price which is the bid. The difference between the two prices is referred to as the spread. High volume pairs like the EUR/USD will typically have tighter spreads than other pairs that don't generate as much trading volume.

If you think that the EUR is going to strengthen against the USD, you would buy the EUR/USD. If you think that the EUR will weaken against the USD, you would sell the EUR/USD. This later trade is referred to as shorting the market and involves no additional costs or restrictions in the FX market. Since the direction of interest rates in a country does not change that often, the FX markets are known for their long trending moves.

FX charts will typically show the sell price only on the charts. This can cause some confusion when traders get stopped out of their sell trade with a protective buy stop and see on the chart that the sell price never moved up to their buy stop level.

That is because of the spread on the pair.

What Does Spread Tell A Trader

Talking Points

  • 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.

Every market has a spread and so does Forex. It is imperative that new Forex traders become familiar with spreads as this is the primary cost of trading between currencies.

Today we will review the basics of reading a spread and what the spread tells us in regards to the costs of our transaction.

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Spreads and Forex

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 anonymously call this the Bid: Ask spread.

Below we can see an example of the spread being calculated for the EUR/USD.

First we will find the buy price at 1.35640 and then subtract the sell price of 1.35626. What we are left with after this process is a reading of .00014. Traders should remember that the pip value is then identified on the EUR/USD as the 4th digit after the decimal, making the final spread calculated as 1.4 pips.

Now we know how to calculate the spread in pips, let’s look at the actual cost incurred by traders.

Spreads Costs and Calculations

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.

Using the quotes above, we know we can currently buy the EUR/USD at 1.3564 and close the transaction at a sell price of 1.35474.That means as soon as our trade is open, a trader would incur 1.4 pips of spread. To find 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 EUR/USD lot with a $1 pip cost, you would incur a total cost of $1.40 on this transaction.

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.

Changes in 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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Trading in leveraged currency contracts comes with substantial risk. You must be aware of these risks before opening an account to trade. High leverage amplifies gains as well as losses, leading to potential loss of the entire account balance. Trading in leveraged currency contracts may not be suitable for every investor. Never speculate using money that you cannot afford to lose.

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