Understanding Spread in Forex Trading & How to Calculate it?

What is forex trading?

Forex is the abbreviation to foreign exchange markets, wherein people exchange different national currencies at a price specific to a particular time. As the prices relative to two currencies being exchanged, vary with each second that goes by, the profits are made by investors by predicting the monetary value of one currency against the other, in the immediate or near future.

People, banks, and companies extensively convert one currency into the other on the forex trading platforms to make a profit.

Okay, now that we are done with understanding what forex trading actually means, let’s move onto understanding the basics of "spread" in forex.

What is Spread in Forex Trading & How to Calculate it?

As a new investor in the forex markets, ‘spread’ is the term that you must be hearing a lot from the pros in the game. And, you must be wondering, what is spread in forex trading? That’s exactly what we are going to cover in this blog post. We will talk about what a forex spread is, and how to calculate spread in forex, and will also suggest a few low-spread forex brokers whose trading platforms you can explore for investing purposes.

Meanwhile, let’s understand that ‘spread’ is what brokers make money from.

Spread in Forex Trading: The Meaning

In the simplest of words, a spread is a difference between the ‘Buy’ & ‘Sell’ prices of a currency pair at a specific time during the day. For example, if you are trading on the USD/GBP currency pair, and let’s say the ‘Buy’ and ‘Sell’ prices at a specific time in the forex markets be 1.23331 and 1.23291 respectively. This means that a spread of ‘4’ is existing at this very moment on this specific currency pair.

How to calculate spread in forex trading?

Now, how did we calculate the spread in the above example?

Let’s discuss it below.

So, when we calculate spread, we consider the 4th decimal place for both the ‘Buy’ and ‘Sell’ prices, and basis that, make the calculation.

In the above example, forex spread will be calculated as follows:

1.2333 - 1.2329 = 4

This number ‘4’ which is the forex spread in the above-provided example, is also called ‘pip’. And therefore, we can say that there existed a spread of 4 pips for the mentioned currency pair for that specific instant of time in the forex markets.

Tight & Wide Spread in Forex Trading

It is noteworthy here that spreads keep changing all throughout the day in the currency markets. When it is a smaller number, somewhere between 1 & 3, it’s called as a ‘tight or low spread’, and when the spread for a currency pair ranges above 4 pips, it’s commonly termed as a ‘wide or high spread’.

Top Global Brokers that Offer Tight Spread in Forex Trading

Some of the prominent names when it comes to forex brokers that offer a tight spread on currency pairs, comprise - IC Markets, Interactive brokers, Exclusive Markets, IG Markets, CMC Markets, and many more. Among these popular names, ‘Exclusive Markets’ stands out, as it’s a highly regulated platform that offers an unmatched transparency by avoiding any hidden costs, and by offering thousands of financial instruments to trade into.

Moreover, when it comes to tight spreads in forex trading, traders from across the globe swarm to its platform to take benefit of the low spreads.

Concluding Remarks..

Although we have covered all the basics of understanding a spread in forex trading, we would like to mention a few more crucial characteristics pertaining to a forex spread.

Traders usually have a liking for tighter spreads. That way, they restrict the broker commissions to some extent, at least, thereby saving their capital. When the markets become volatile, the spreads generally become wider. News announcements pertaining to the financial markets, mostly, cause volatility, thereby pushing spreads to fluctuate at an intense rate.

That’s all for now about spread in forex trading. Until we come up with something new on forex trading, we bid you a goodbye. Cheers!