As we all know that understanding the situation in any sphere of life can make a person an intelligent one and can also help to apply this huge theoretical baggage in practice. That’s why let’s talk about spread.

Spread is one of the basic terms of Forex market. It is the difference between the bid and ask prices.

Ask price is the highest price in the pair’s quotation, at which a trader buys the currency standing first in the abbreviation of the currency pair. It means that trader sells the currency standing second. Bid price is the lowest price in the quotation of the currency pair, at which a trader sells the currency standing first in the abbreviation of the currency pair. Respectively, a trader buys the currency standing second.

If you are going to purchase the base currency (to long the pair) relying on your expectations of its increase, you should perform the purchase at the buy price which always higher than the sell price and you'll lose the spread difference if you suddenly decide to sell this currency at once. Simply speaking, the rise of the currency price that you have bought may cause you the losses.

In case you sell the base currency and decide to buy back the currency you have just sold while the rate did not move a point, then the difference you will lose will be the spread that is 5 pips in the given example.

The trading platform will inform you of the purchase or sale price at which you have bought or sold the currency pair. So if you have bought the pair, the trade platform will show you both your bought price and the current sell price which can be calculated as the by price subtracting the spread. If you want at least to break even, you should wait until the market makes at least a few pips up. The resume can be that the smaller the spread, the better as you'll have to wait a little time before the market moves enough pips for you to run a surplus.

A pip is a number value. In the Forex market, the value of currency is given in pips. One pip equals 0.0001, two pips equals 0.0002, three pips equals 0.0003 and so on.

One pip is the smallest price change that an exchange rate can make. Most currencies are priced to four numbers after the point.

The value of one point in US dollars differs both for different currencies and for the same currency with various quotations. The amount of the deal also influences the value of one point. Overall, the scheme for calculating the value of one point of the currency in US dollars can be demonstrated like this:

Value of the Point = Amount of Deal * Point

This scheme lets you get the results in the quoted currency. To calculate the value of one point back from the quoted currency to US dollars, divide the result by the “ask” (offer) rate of the quoted currency against US dollars - in case the quoted currency has a direct rate. Alternatively, multiply it by the “bid” rate of the quoted currency against US dollar - if the quoted currency has a reverse rate.

All these spreads of the Forex currency pairs are also significant due to the fact they can impact on a trader's scheme of trading in a more global way. Any trader wants to see trade lofty (like those in futures and stocks trading) and is quite concerned if his trade is low. Wider Forex market spreads always denote high trades plus having lower retails. Even if a spread is low and equals a half-pip - not even whole one pip - it can show you as a trader the difference between currencies in the pair and prompt to hold a deal for a while. From this point of view spreads can be very helpful.

Smaller spreads are better for Forex investors because a smaller movement in exchange rates lets them profit from a trade more easily.

send message