Forex spreads explained: Main talking points
- Spreads are based on the buy and sell price of a currency pair.
- Costs are based on forex spreads and lot sizes.
- Forex spreads are variable and should be referenced from your trading platform.
It’s important for traders to be familiar with FX spreads as they are the primary cost of trading currencies. In this article we explore how forex spreads work, and how to calculate costs and keep an eye on changes in the spread to maximize your trading success.
What is a spread in forex trading?
Every market has a spread and so does forex[1]. 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.
Below we can see an example of the forex spread being calculated for the EUR/USD[2]. First, we will find the buy price at 1.13398 and then subtract the sell price of 1.3404. What we are left with after this process is a reading of .00006. Traders should remember that the pip value[3] is then identified on the EUR/USD[4] as the 4th digit after the decimal, making the final spread calculated as 0.6 pips.
Now we know how to calculate the spread in pips, let’s look at the actual cost incurred by traders.
How to calculate the forex spread and costs
Before we calculate the cost of a spread, remember that the spread is just the ask price less (minus) the bid price of a currency pair. So, in our example above, 1.13404-1.13398 = 0.00006 or 0.6 pips.
Using the quotes above, we know we can currently
