Spread in Forex Trading: Calculation & Strategy

They make money through the spread, as they buy at the bid price and sell at the ask price, pocketing the difference. MetaTrader 4 (MT4) is an automatable forex trading platform, and it has been popular with forex traders for over 15 years. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. 70% of retail client accounts lose money when trading CFDs, with this investment provider. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money.

When market volatility is low, spreads tend to be tighter, as market makers can afford to offer competitive rates. However, during times of high volatility, such as major economic or political events, spreads tend to widen as market makers adjust to the increased risk. Our trading platform has been voted the best in the UK,i and you can use it to trade over 80 currency pairs including majors like EUR/USD and GBP/USD, and minors like CAD/JPY and EUR/ZAR. The forex spread may increase if there is an important news announcement or an event that causes higher market volatility. One of the downsides of a variable spread is that, if the spread widens dramatically, your positions could be closed or you’ll be put on margin call. Keep an eye on our economic calendar to stay abreast of upcoming financial events.

The bid price is the price at which you can sell the base currency, whereas the ask price is the price you would use to buy the base currency. And traders with larger accounts who trade frequently during peak market hours (when spreads are the tightest) will benefit from variable spreads. Having a dealing desk, allows the forex broker to offer fixed spreads because they are able to control the prices they display to their clients.

Forex spread summed up

Definitely ask your broker about the spread they use on currency transactions. Spreads widen due to lack of liquidity and the last one happens due to major price swings, limit orders being removed and market participants not submitting market orders. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. Since spreads never change, you’re always sure of what you can expect to pay when you open a trade.

1. A low spread generally indicates that volatility is low and liquidity is high.
2. Alway remember that forex spreads are also impacted by market moving news, not just the broker’s incentive to profit off of a transaction.
3. However, breaking news or unexpected economic data can be difficult to prepare for.
4. Conversely, the ask price is the price at which the forex broker is willing to sell the base currency in exchange for the counter currency.

To start trading on some of the best currency pairs in the forex market, we have provided a list of suggestions here. For example, if the spread is 1.4 pips and you’re trading 5 mini lots, then your transaction cost is $7.00. The question of which is a better option between fixed and variable spreads depends on the need of the trader. This is because the variation in the spread factors in changes in price due to market conditions. Using a dealing desk, the broker buys large positions from their liquidity provider(s) and offers these positions in smaller sizes to traders. The type of spreads that you’ll see on a trading platform depends on the forex broker and how they make money.

What determines the spread in forex?

The bid-ask spread is the difference between the price a broker buys and sells a currency. So, if a customer initiates a sell trade with the broker, the bid price would be quoted. If the customer wants to initiate a buy trade, the ask price would be quoted.

If the forex market is very volatile and not very liquid, spreads will likely be wide, and vice versa. For example, major currency pairs such as EUR/USD will have a tighter spread than an emerging market currency pair such as USD/ZAR. However, spreads can change, depending on the factors explained next. The spread in forex changes when the difference between the buy and sell price of a currency pair changes. This is called a variable spread – the opposite of a fixed spread.

Fixed spreads stay the same regardless of what market conditions are at any given time. In other words, whether the market is volatile like Kanye’s moods or quiet as a mouse,  the spread is not affected. In most cases, the change in value will be slight, and the market maker will https://www.wallstreetacademy.net/ still make a profit. It can happen, for example, that they accept a bid or buy order at a given price, but before finding a seller, the currency’s value increases. This charge—which is the trade’s difference between the bidding and the asking price—is called the «spread.»

You can watch the most liquid forex parings to get a sense of what a good spread is in forex. It might also help to compare the spreads between brokerages to ensure you’re getting the best deal. The spread may not seem like much, but .0004 profit equates to four pips, or $40 profit for a standard lot of EUR/USD. To better understand the forex spread and how it affects you, you must understand the general structure of any forex trade. One way of looking at the trade structure is that all trades are conducted through intermediaries who charge for their services. It compares the value of one currency against the value of another.

Understanding Forex Trading

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. The spread in forex is the primary cost of trading currency with us.

How do you determine the spread cost?

But don’t worry, it is a lot easier to determine a spread than it seems. It’s important to note that the FX spread can vary over the course of the day, ranging between a ‘high spread’ and a ‘low spread’. If your account is denominated in another currency, like GBP, you would have to convert it to US Dollars. If it can sell the iPhone for $500, then if it wants to make any money, the most it can buy from you is $499.

With us, you can trade forex using derivatives like spread bets and CFDs, 24 hours a day. Derivative products enable you to take a position on forex without taking ownership of the underlying asset. This causes market makers during their competitive battle for pricing to also widen their spreads to mitigate the risk of a loss while fulfilling orders. As we mentioned, external market factors can have a significant impact on forex spreads in either direction.

This is represented by a single digit move in the fourth decimal place in a typical forex quote. Also, keep in mind that the higher the spread, the smaller the profit margin you will have for each unit that you are buying. Conversely, the tighter the spread the more money you can make off of your investment. As mentioned above, traders who are just starting out need to consider the spreads that brokers offer, and do so closely. Now we know how to calculate the spread in pips, let’s look at the actual cost incurred by traders.