What is Spread?

Spread meaning

In forex market spread means the difference between bid and ask price. This value changes per second as the fluctuation of price is the main fundament of forex market.


Spread is basically exchange rate of the currency pair, in which base currency is shown on 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 currency pair the left side of the currency pair is base currency. For example, in EURUSD currency pair EUR is the base currency.

Fig 2. Illustrates the Base currencies

Quote currency : In currency pair the right side of the currency pair is quote currency. For example, in 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 sell price, with the underlying market price is 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 forex market, we have to subtract ask price from 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 ask price of USDCAD is 1.4535 then 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 forex market which is measured in pips.

How forex spread is quoted?

Below shown fig. illustrates how 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 broker offers fix spread. For example, in exness the raw spread account type has fix spread value. Though spread is changed every second as per the market movement.


Therefore, it is also suggested to first read and analyse the spread provided by broker because lesser the spread more the profit and vice versa.

How volatility effects spread?

Spread is directly impacted by the volatility higher the volatility higher the swap. In other words, spread is directly proportional to volatility. Therefore, investor analyse market and look for news as well so that if there is any major event which is going to happen than they trade accordingly. As major events affect the most on forex market volatility.

What is high and low spread?

High spread means when there is a large number of difference between bid and ask price. Generally, emerging currency pairs have high spread as compared to major currency pairs. Higher spread can occur because of two reason either the volatility is high or the liquidity is low.


Low spread means when there is small number of difference between bid and ask price. Generally, major currency pair has low spread values. Low spread means volatility is low and liquidity is high.

Conclusion

Overall, spread is also one of the important terms to know about which is defined as the difference between bid and ask price. There can be two possibilities of spread either it will be high or low. High spread means the difference between bid and ask price is huge whereas, low spread means the difference between 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.