The forex trade or foreign exchange market is the biggest financial market all around the globe because forex pairs are involved if you want to trade stocks, crypto, or CFD. In the forex market, you earn by trading currencies. It is also known as Currency Exchange. In a 2019 survey, the daily volume of the forex market was around 6.6$ trillion. If you are interested in making money on forex, learning about the spread is essential.
In this post, you are going to learn what is spread in forex? Why is spread important in forex, and how to calculate spread in forex? Let’s get straight into it!
The spread in forex trading can be defined as the difference between the selling and buying price of a pair of currencies. The Sell/Buy is also known as Bid/Ask in forex trading. It is essential to learn about the spread in the Forex Market. The Commission free Brokers earn money by the spread of a currency.
To understand the spread properly, have a look at this example. Think about that when you pay the market price to buy a new car. Now, after you drive your car and days and months pass, your car starts getting devalued.
If you wish to sell the car now, there would be a notable difference between the price you bought it for and what you’ll get for it. This difference of the purchase and sale price is somewhat similar to the Spread in forex trading. Just instead of the car, you trade currencies.
Spread is the most significant concept in the forex market that you should learn about as it can make or break your trading journey. Nearly all of the brokers on the forex market earn profits through the spread. The price you pay for your transactions on forex is called spread, as we’ve discussed.
Most of the brokers in the forex market do not charge any commission on the currency’s trade. They earn their profits through the spread of the individual’s trade. Take note that very few forex brokers charge commissions and spread both.
In forex trading, spread enables the brokers to earn their profits without even charging a real commission on each trade. Brokers also use these concepts as a marketing tactic by emphasizing the phrases like ‘ No Commission Trading’ or ‘ Commission Free trading.’
As a trader on forex, the spread is considered for choosing to trade a specific currency and calculate the profits. You can think of the forex spread as a substitute for commission. As a trader, you must think of the Forex spread as an alternative to commission. Let’s now look into how you can calculate spread in forex.
After you’ve understood what spread means in forex trading, you should now learn how to calculate spread. Calculating the forex spread is easy. This easy formula can be used to calculate or measure forex spread.
To calculate your forex spread, you’ll need to simply find out the buy and sell price difference in pips. To do this, subtract the Bid Price from the asking price.
(Bid price-Ask Price)
Here’s an example for you to understand clearly:
Let’s suppose you’re trading GBP/USD, which is currently at 1.3089/1.3091, so to calculate the spread of this trade, subtract ‘1.3091 – 1.3089’, the answer you’ll get by subtracting both prices is called the spread, which will be 0.0002 (2 pips) for this example.
Let’s look into what a high and a low spread means in Forex.
A high spread indicates a large difference between the bid and ask price of the currency.
A low spread indicates a small difference between the bid and ask price of a currency.
Forex is an ever-growing marketplace of trading currencies. There isn’t any limit on how much you can earn. How much money can you make depends upon how much risk you take? The most significant risk is not taking any risk. Forex trading has benefits such as convenient market hours, trading on margin, and high liquidity. Almost everything you need to know about the spread in forex has been covered in this short guide. I hope you found this post helpful.