Spread in Forex – What Is Spread in Forex?
As you know, in Forex trading or FX trading, we deal with an internationally approved currency called “quote currency” assuming another currency as the “base currency”, in the buying and selling process or call it trading, it is either gain or loss.
The obvious question that has come to your mind, how do I gain or lose? The matter is simple, you have bought the currency with respect to the base currency at one price and when you sell it in the Forex market at any later time, the price of the currency with respect to the base currency may put up or go down. So when you decide to sell the quote currency, the difference is your gain or loss. But, several factors are in your profit from trading and spread is one of the most important factors.
In between your buying the base currency and selling it at a later time, lies the concept of spread in Forex. If you want to know, what is spread in Forex, we have to dwell deep into the matter. There a few terms and concepts you need to understand.
In Forex trading, at any point in time, you are dealing with two currencies called Currency pair or Forex. In Currency pair, the value of one currency is measured with respect to the value of another. As stated above, one is called the base currency and another quote currency.
The Currency pair is expressed as “Base Currency/Quote Currency” and it is read as the value of the quote currency against a unit of the base currency. If you read a currency pair like USD/INR and it is 72.5130, it means the value of 1 USD is 72.5130 INR.
During trading, two prices always popup against a Currency pair:
· Bid price – The price at which you can sell the base currency to the broker. In the above example, if the bid price is 72.5133 INR, it means you sell it at that mentioned price.
· Ask price – The price you need to pay right now to buy the base currency from the broker. In the above example, if the ask price is 72.5134, you have to pay this amount to buy 1 USD.
Another value, the market price, remains somewhere in between the bid price and ask price.
Just at this point comes “Spread” in the forefront. Spread is (Ask Price – Bid Price), here, the spread is 1 pip. Let’s discuss spread a little bit elaborately.
What is spread in Forex?
Spread is the difference between ask price and bid price mentioned without the decimal point. The unit of spread in Forex is PIP. PIP is the contraction of “percentage in point”. In the above example, the difference between the ask price and bid price is 0.0001 so it is 1 pip. If it is 72.5133/72.5140, then the spread is 17pip.
Now, the question that obviously arises, what is the relevance of Spread in trading?
· The broker may or may not charge any commission on trading (from a trader/you) but they will always charge the spread on the trading.
· The spread is the cost of a transaction initiated by a trader and approved by the broker (there may be other costs as well).
· The broker makes a profit through spread from each currency pair, no matter whether you are buying or selling.
· As the spread depends on the bid price and ask price, these prices against a currency pair may vary from broker to broker.
· Apart from brokers, there might be one or more leveraged middlemen who can charge the spread.
· In each currency pair, the spread varies. As a trader, you should update this aspect of Forex trading.
Knowing the spread and how a broker has been changing the pip over the last couple of months is important in trading. Your profit out of this marketplace will largely depend on the spread.