How to Calculate Spread in Forex? (Easy Guide)

How to calculate spread in forex?

Calculating spread in forex trading helps you plan your trading better, whether by choosing the right account type, selecting the best currency pairs for your budget, or managing your risk more effectively. As well as helping you understand how much you need to pay per trade, since the spread is the first fee you need to pay when entering a trade,

What Is The Spread in Forex?

The spread in forex is the difference between the broker's buy rate (bid) and the sell rate (ask) when exchanging in the forex market. The spread can be narrow or wide, depending on the volatility and market conditions:

• Narrow Spread means the market is entering a high-liquidity, low-volatility phase.

• Wide Spread means the market enters low liquidity but high volatility.

How Are Forex Spreads Quoted?

• Everything starts with currency pairs, so you always need 2 currencies to trade, whether major, minor, or exotic pairs such as USD/MXN.

• From then on, they will be quoted on the market to trade with a bid and ask price.

• The broker adds a spread as a fee for the service between the market and the investors.

• You will pay the spread measured in pips, which is the size of the price movements of the currency pairs.

How Are Forex Spreads Quoted?

Each currency pair has different bid and ask prices; here are some examples for typical major and minor pairs. These spreads are changed by the market volatility, broker policies, and market conditions.

Example of Forex Spreads Quoted:

How is Pips related to Spread?

Spread is measured in pips. A pip is the percentage in points, and it is the smallest price movement in a currency pair.

• Smaller pips or lower spreads mean the trading cost gets cheaper.

• Bigger pips or higher spread means the trading cost gets higher.

Step-by-step: How To Calculate Spread in Forex

If you would like to know the cost of trading and spread, here are the guidelines that you can easily follow step by step.

Step 1: Find your Bid and Ask prices

First, you need to look at the prices of a currency pair you trade; it is always shown with 2 numbers:

• Bid Price is a price that the broker or market maker is willing to buy

• Ask Price is the price that the broker or market maker is willing to sell

Step 2: Calculate Using the Spread Formula

We will use this spread formula to calculate your spread:

Spread = Ask price - Bid price.

Step 3: How to Convert the Spread to Pips?

As we mentioned earlier, spreads are measured by pips; knowing pips will help you know the trading cost.

• Major, Minor, and Exotic currency pairs will convert 1 pip to 0.0001

• Other pairs with JPY will convert 1 pip to 0.01

To convert the spread to pips, you can use this formula:

Spread in pips = spread/pips

Step 4: Check The Lot Size and The Pip Value

To calculate spread by lot sizes, it shows you how much per trade you are about to enter, and it can calculate the next step-by-step.

We will use this standard forex trading to convert between lots and units.

You can find the Pip value by calculating your lot size using the formula below:

Pip value = Lot Size x 0.0001 (pip from major currency pair)

Step 5: Calculate Spread Cost

To know the exact cost of the spread that you need to pay, you can calculate it using this spread, but in the pips formula:

Spread Cost Formula = Spread (in pips) x Pip Value x Number of Lots

Why Is Calculating Spread in Forex Important?

Spread is one of the most important costs that traders need to know because it will help them trade more effectively, especially short-term traders.

• Spread helps traders manage risk: Knowing the spread will help you set your profit targets and stop losses better.

• The spread shows the cost that you will pay when you enter the trade; this will guide you on how much you need to pay so you can manage the cost.

• Helps traders choose the brokers and the currency pairs that has the fair trading cost by comparing the spread

• If you are a short-term trader, knowing the spread will help you select the lower spread.

Why Does The Spread Change in Forex?

Spread has 2 different types: one is a fixed spread, and the other is a variable spread, which changes following the external effects such as major news, economic events, trading volume, or currency volatility. Some brokers offer a fixed spread, so it will be a fixed spread cost, or some brokers offer a variable spread, allowing you to take the benefits from the high market volatility.

Tips To Help You Reduce The Trading Cost

When you enter the market, you might think about how much profit you want to make out of the market and not about paying extra costs for the trade. We have some tips that will help you reduce the spread cost below:

• Choosing the high liquidity currency pairs to trade is important. The tighter or narrower the spread is, the lower the cost you will pay.

• It’s better to enter the market during the opening market hours, especially when the London and New York sessions open.

Conclusion

Learning how to calculate spread in forex is essential to knowing how you can save on your trading costs. When you know the spread, then you can find pips that will help you know how much you risk per trade. You can find the pip value to know how much in USD you gain in profit or lose per pip for each lot.

Overall, calculating spread is important for short-term traders or traders who want to trade more effectively and manage better risk in the forex market. You can also choose to install the spread indicator (MT4 and MT5) on your trading platform to calculate.