What is the spread in forex and how do you calculate it?
Every market you can trade with us has a spread, which is the primary cost of trading. Learn more about a forex spread, including what it is and how it’s calculated.
What is the spread in forex?
The spread in forex is a small cost built into the buy (bid) and sell (ask) price of every currency pair trade. When you look at the price that’s quoted for a currency pair, you will see there is a difference between the buy and sell prices – this is the spread or the bid/ask spread.
Changes in the spread are measured by small price movements called pips – which is any change in the fourth decimal place of a currency pair (or second decimal place when trading pairs quoted in JPY). It is not only the spread that will determine the total cost of your trade, but also the lot size.
Remember, every forex trade involves buying one currency pair and selling another. The currency on the left is called the base currency, and the one on the right is called the quote currency. When trading FX, the bid price is the cost of buying the base currency, while the ask price is the cost of selling it.
With us, you can trade forex using derivatives like CFDs, 24 hours a day. Derivative products enable you to take a position on forex without taking ownership of the underlying asset. You can go long or short, which means you can speculate on rising as well as falling currency prices. And, you only need a small deposit – called margin – to open your position.
The margin on a forex trade is usually 0.5-0.75% of the value of the trade, which means you can make your capital go further while still getting exposure to the full value of the trade. Note, while margin can magnify your profits, it will also amplify any losses.
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How to calculate the spread in forex
To calculate the spread in forex, you have to work out the difference between the buy and the sell price in pips. You do this by subtracting the bid price from the ask price. For example, if you’re trading GBP/USD at 1.3089/1.3091, the spread is calculated as 1.3091 – 1.3089, which is 0.0002 (2 pips).
Spreads can either be wide (high) or tight (low) – the more pips derived from the above calculation, the wider the spread. Traders often favour tighter spreads, because it means the trade is more affordable.
If a 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.
Why does the spread change in forex?
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. When trading forex, you will always deal with a variable spread.
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.
Forex trading platforms
There are a range of forex trading platforms to choose from, including our award-winning platform, MT4 or an MT4 VPS. Each of these platforms will show the forex spreads up front.
Our trading platform
Our trading platform has been voted the best in Switzerland1, 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. Our minimum forex spreads start at 0.6 for EUR/USD and AUD/USD.
You’ll also get in-platform news and analysis from our expert team and Reuters, as well as technical indicators like moving averages and relative strength index (RSI) to help you conduct technical analysis.
MetaTrader 4
MetaTrader 4 (MT4) is an automatable forex trading platform, and it has been popular with forex traders for over 15 years. When you create an MT4 account with us, you’ll get access to MT4 and our full range of MT4 forex markets, as well as a number of free indicators and addons to help you conduct analysis and customise the platform. Our minimum MT4 forex spreads start at 0.6 on EUR/USD.
Forex spread summed up
- A forex spread is the primary cost of a currency trade, built into the buy and sell price of an FX pair
- A spread is measured in pips, which is a movement at the fourth decimal place in a forex pair’s quote (or second place if quoted in JPY)
- To calculate the forex spread, subtract the buy price from the sell price
- Forex spreads are always variable, whereas other markets’ spreads may be fixed
- Spreads can either be wide (high) or tight (low)
- Traders often favour tighter spreads, because it means the trade is more affordable
- If a market is very volatile and not very liquid, wide spreads may occur
- If a market has high liquidity but is not very volatile, tighter spreads may occur
- Factors like important news announcements or an event that causes higher market volatility can cause spreads to change
Footnotes
1 Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2022
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
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