In forex trading, a forex broker quotes two price rates for a currency pair. One is called bid price (sell price) and the other is called ask price (buy price). The bid price is always lower than the ask price. Spread is defined as, the difference between the bid price and ask price is called “spread”. Generally, it is present in Pips/Points. Pip is a value of the currency, where one pip is equal to ten points. Each broker charges the clients for their services. So, a spread is the services charges receives from the clients.
Types of Spread in Forex:
There are two types of spread in forex, i.e. fixed spread and variable spread.
- Fixed Spread:
Fixed spread doesn’t change ask and bid prices at any condition of the market. Mostly it offers by the dealing brokers.
- Variable Spread:
Variable spread also known as floating. It always fluctuates according to the liquidity of the market. A variable spread offered by non-dealing desk brokers. Because it gets rates of currency pairs from multiple liquidity providers (LPs) and presents these rates directly to the traders. A variable spread doesn’t control by the broker therefore, it is not suitable for scalpers. Because scalper is doing short time trading, gets five or ten pips profit.
How to Calculate Spread in Forex?
You can calculate spread by using the following formula,
Spread = Ask Price – Bid Price
Spread = 1.13236 – 1.13206
Spread = 0.00030 Points or 3 Pips
The forex spread percentage calculating formula is,
Spread % = Ask Price – Bid Price / Ask Price *100
In the above EURUSD quote, you can see the ask price 1.13236 and bid price 1.13206. This means if we buy or sell EURUSD, we will pay 30 points (3pip) to the broker. Different currency pairs charge various numbers of Pips/Points. The amount you will pay to the broker depends on the Lot size. The big Lot size you opened, the more amounts you will pay e.g.
The cost of 0.10 lots is $1, and
You will pay to the broker 03 Pips then,
$1*3= $3 will pay to a broker to open 0.10 lots