What is a forex spread?
A spread is the difference between the ask price and the bid price. In other words, it is the cost of trading. For example, if the Euro to US dollar is trading with an ask price of 1.14010 and a bid price of 1.14000, then the spread will be the ask minus the bid price. In this case, 0.0001. The spread of 0.0001 is equal to one pip. Spreads are calculated in the same way for yen-based currencies like USDJPY. If the yen to the US dollar is trading with an ask price of 120.42 and a bid price of 120.40, then the spread will be 0.02 (120.42 – 120.40). This is equal to 2 pips.
Why is the Bid-Ask spread important in forex?
The spread is the cost of the forex transaction, and you’ll want to determine if that cost suits your trading style. For example, if you make many short-term trades, a wide spread could leave you with little profit.
What is the Bid/Ask spread formula?
To calculate the spread as a percentage, subtract the bid price from the ask price, divide the answer by the ask price, and then multiply the result by 100. For example:
ASK PRICE 1.1502 – BID PRICE 1.1500 x100 = SPREAD 0.0173% ASK PRICE 1.1502
What is a ‘tight spread’ in forex trading?
A tight spread – also called a narrow spread – is when the difference between the ask price and the bid price is small.
Are tight spreads good for forex traders?
The tighter the spread, the sooner the price of the currency pair might move beyond the spread — so you’re more likely to make a gain. Plus, the cost of the trade is lower.
Why do Bid-Ask spreads narrow or widen?
The spread is mostly dictated by liquidity levels – how many people are involved in trading a currency pair. Higher activity in the market means a narrower spread, lower activity means a wider spread.
What is a floating spread?
A floating (or variable) spread is when the difference between the Ask and Bid prices fluctuates. This is usually due to market factors such as supply, demand and the amount of total trading activity.