If you are into Forex trading, you may have heard of the words “Spreads” often. This word is usually ignored, as not many people put thought into it. However, it is probably one of the most important things that need to be considered. It is important to calculate Forex spreads to ensure that you are successful in your business. In this article, we shall tell you how to calculate Forex spreads.

An insight to Forex Spreads

If we want to understand how to calculate Forex spreads, we first need to understand what it is. Forex spreads are a difference in the bid price and the asking price of a currency pair in the foreign exchange market. In turn, the bidding price, in turn, is the price is the highest price a customer is willing to pay for goods, and the asking price is the price a seller states they will accept.

How to Calculate Forex Spreads

In a currency pair, you will see two things, a “Base Currency” and a “Counter Currency” which are the rates of “Bid Price” and “Ask Price” respectively. It should be noted that the bid price will always be higher than the asking price, and you will subtract the asking price from the bid price.

Once you find the difference between the bid and ask price, you find the spread, they are measured in the unit of pips. It depends on the currency of exchange. In the Japanese currency, it is to 2 decimal places, and in most other currencies it is up to 4 decimal places. For example, 0.0001 in EUR or USD base currency would be 1 pip.

Benefits of Trading with Low Spreads

Trading with low spreads in the Forex market has a lot of benefits. They are as follows:

Low Spreads Means Easier Transactions

When a spread is closer to zero, it makes the transactions easier. In other words, you lose less money in the long run and you do not have to worry about not being able to benefit from the transaction.

Opens Many Positions in a Short Amount of Time

Closer spreads ensure that you have many positions available in a short time. That means your trades will be open and active for a long time and will result in higher bidding (potentially). Traders need to consider this factor when trading in Forex.

Beneficial Liquidity and Volatility

Liquidity and Volatility of the market are key points that determine your success in Forex. If they are not reasonable, it may lead to significant losses and put you at a disadvantage. On the other hand, beneficial liquidity and volatility means a fruitful business

Final Thoughts

Forex spreads play a big role in your successful trade, and you have to keep a constant eye on it. It may go up and down and you need to know what measures must be taken as you have high and low spreads. As you earn experience in Forex trading, you will understand the spreads better.

References

CFI, PipsEdge, TheForexGuy, Investopedia.