what is spread in Forex Market?

The spread is an inevitable part of trading and is the profit taken by the broker. When trading Forex, whether through a Forex account or using spread betting, the broker does not charge you a fixed or monthly fee for operating the account. The broker does not take any direct transaction charges for taking a trade either. Instead, the broker offers two different prices for a currency trade, often referred to as the bid price and the offer price. These are the brokers prices, describe what the broker is doing, the broker is bidding and offering. You buy at the offer price and sell at the bid price. The difference is called the spread and is the broker’s profit margin.

Let’s look at some examples



These are the prices at which I can buy and sell Euro dollar, the currency pairing of the EURUSD (Euro and the US Dollar) the price you can sell them to the broker is 1.2612. This is the bid price, or what the broker is bidding to buy your currency. When looking at Forex charts, it is most common to have the bid price displayed. If you wanted to buy this currency from the broker, you would have to pay 1.2614. This price is called the offer price, or ask price or the price the broker is offering to sell you the currency.

MID PRICE

There is another price called the mid price. 
The mid price, as its name suggests, is the middle point between the two prices. Take the bid and offer price, add them together and divide by two to obtain the mid price. The mid price is not often used, as you can’t actually trade at this price. It may be useful when the market is very slow or volatile. Currency movements are measured in pips. The spread is the difference between the bid and offer prices and is expressed as a number of pips.


How to Calculate the Spread?

To calculate the spread, move the decimal point four places to the right and simply deduct the bid price from the offer price. In this example, (EURUSD) Euro Dollar is trading with the spread of 2 pips.


When you look at a price chart based on the bid price, you need to add the spread to the bid price whenever you are contemplating buying the currency to find your true cost. Spreads on different currency pairs vary. The calculation is the same, so move the decimal point four places to the right and deduct the bid price from the offer price to obtain the spread.

GBPUSD (Cable) is trading here with the spread of 3 pips



On some of the less commonly traded currency pairs, it is normal to see spreads a lot higher. Here, the NZDUSD Kiwi Dollar and the Swiss Franc are trading with the spread of 7 pips.

You might decide this is too high for you to trade. Your might restrict the currency pairs you trade on certain strategies as a result of the spread. When it comes to trades involving the AUDJPY, the decimal place is moved two places to the right to calculate the spread.



In this case, the AUDJPY Aussie Dollar is trading against the Japanese Yen with a 4 pip spread. Competition amongst brokers is fierce and often seen in their advertising by the spreads they quote. Competition amongst brokers is fierce and often seen in their advertising by the spreads they quote.

EURUSD Euro Dollar is the most heavily traded currency pair and usually has the tightest spreads. Brokers are keen to let you know how tight (or narrow) their spreads are on Eurodollar at 5 decimal places. To calculate the spread still means moving the decimal point 4 places to the right. In this example, the spread is 1.3 pips. The equivalent for pricing the Japanese Yen is to quote the price to three decimal places. Like in example given below:





Most brokers now use variable spreads. This means the broker can change the spread at will. During periods of normal trading, this leads to very competitive spreads. When trading is “thin”, which means not very much activity, brokers often widen their spreads. This can sometimes be seen at the beginning of the week when the market is opening and at the end of the week when it is about to close. Givenare variable


It can mean the bid and offer price moving quite independently of each other. This can also happen at times of high market volatility.
Although the spread is the brokers cut, it is not generally seen as a transaction cost. When trading, the focus is on the bid and offer prices at the moment in time when the trade is executed. When trading, the focus is on the bid and offer prices at the moment in time when the trade is executed.
You can see the impact of the spread at the precise moment you take the trade. For example, trading EURUSD Euro Dollar at £2 per pip with the spread of 1.1 pips results in a cost of £2.20.



Rather than focus on this cost, you will be looking at the P&L as the trade progresses and either the net profit to you, or the total cost.

QUICK RECAP

Rather than focus on this cost, you will be looking at the P&L as the trade progresses and either the net profit to you, or the total cost. QUICK RECAP While the above platform made our list of best forex trading platforms, there are other extremely high-quality trading platforms you could consider. IG Markets in adding to ProRealTime also have their in-house developed trading platforms and L2 Dealer which is designed for ECN trading. The best Forex platform is MetaTrader 5 based on the popularity of the trading software, dependability and automated trader facilities. The best forex broker offering Best MT5 Forex Broker is Pepperstone, which has some of the lowest spreads in 2022, fastest execution speeds combined with good trading customer service.