What is Spread?
In the forex, market spread means the difference between the bid and ask price. This value changes per second as the fluctuation of price is the main fundament of the forex market.
Spread is basically the exchange rate of the currency pair, in which the base currency is shown on the left of the currency pair, and the quote currency is shown on the right side of the currency pair. The pairing illustrates how much of the quote currency or variable currency equals one unit of the base currency.
Fig. 1 Illustrates Spread Values
Before going to know more about spread two terms which one must know are:
Base currency: In the currency pair, the left side of the currency pair is the base currency. For example, in the EURUSD currency pair EUR is the base currency.
Fig 2. Illustrates the Base currencies
Quote currency: In the currency pair, the right side of the currency pair is the quote currency. For example, in the EURUSD currency pair USD is the quote currency
Fig 3. Illustrates quote currencies.
One thing to note is that the buy price is always higher than the selling price, with the underlying market price somewhere between.
Fig 4. Illustrates bid and ask price.
To understand better look at the picture below:
Fig 5. Illustrates an example where base, quote currency, bid and ask price is shown.
How the spread is calculated in forex market?
For calculating the spread in the forex market, we have to subtract the ask price from the bid price.
Spread = bid price – ask price
Fig 6. Illustrate the formula of spread.
To understand better let’s consider an example, suppose the bid price of USDCAD is 1.4525 and the ask price of USDCAD is 1.4535 then the spread of this currency would be as follows:
Spread= 1.4535-1.4525 = 10 pips
Fig 7. Shows an example to calculate spread.
Spread is always calculated in pips as it is the smallest price movement in the forex market which is measured in pips.
How forex spread is quoted?
Below shown fig. illustrates how the spread is quoted.
Fig 8. Shows the description on how the price of a currency pair is shown.
Spread can be either narrower or wider depending on the volatility of the market and sometimes the spread is fixed also but this is only in the case of account type on which the broker offers fix spread. For example, in exness, the raw spread account type has fix spread value. Though the spread is changed every second as per the market movement.
Therefore, it is also suggested to first read and analyze the spread provided by a broker because the lesser the spread more the profit and vice versa.
How volatility effects spread?
Spread is directly impacted by the volatility higher the swap. In other words, the spread is directly proportional to volatility. Therefore, investors analyze the market and look for news as well so that if there is any major event that is going to happen then they trade accordingly. As major events affect the most forex market volatility.
What is high and low spread?
A high spread means when there is a large difference between the bid and ask price. Generally, emerging currency pairs have a high spread as compared to major currency pairs. A higher spread can occur because of two reasons either the volatility is high or the liquidity is low.
Low spread means when there is a small difference between the bid and ask price. Generally, major currency pair has low spread values. Low spread means volatility is low and liquidity is high.
Overall, the spread is also one of the important terms to know about which is defined as the difference between the bid and ask price. There can be two possibilities of spread either it will be high or low. A high spread means the difference between the bid and asks price is huge whereas, a low spread means the difference between the bid and ask price is low. Spread is directly proportion to volatility in the market higher the volatility higher the spread will be and vice versa.