If you are a newbie in the forex industry, you must know all of the trading instruments. And the spread is among the most critical term within the trading market. In addition, spread also impacts your earnings and can change your trade earnings. Therefore, it is a crucial feature of any trade structure.
However, any trade structure is dependent on two services, the bidding and asking price, respectively. But the spread is the difference between these two prices. In addition, you have to pay spread to your facilitator for offering their trade services. Remember that you have to pay low spreads at busy trade timings.
What is Bid-Ask Spread?
The forex spread gives you the idea of two prices. These two prices include the bidding price of any trading indexes and the selling price of the same index. However, both these prices must be of the same currency pair. In addition, if you buy a trade index at market price. But once you have bought it, then you can sell this index at a lower price.
Therefore, bid-ask spread follows the route of depreciation where your dealer earns the profit due to the difference in buying and asking prices.
How to calculate forex spread?
To calculate any forex spread is a simple task. Firstly you need to understand what is spread in forex? Afterward, you have to learn that spread requires currency pair, which includes two currencies. For instance, take the currency pair of British Pound (GBP) and US dollar. And then assume that the cost of GBP is 1.5321 times higher than the US dollar.
After viewing these stats, you concluded that the GBP market value would increase against the USD dollar. Therefore, you decided to buy a currency pair of GBP/USD at the selling price. However, the broker might not sell you the currency pair at the exact rate. So you have to have a little extra, perhaps 1.5323.
On the contrary, the seller of this currency pair won’t receive the actual payments of 1.5321. Perhaps it will receive a low price of 1.5319. Thereby, the forex spread is the difference between the bidding and selling price is 0.0004.
This spread might sound very low to you. But the forex spread of 0.0004 equals the profit of 40 USD on the standard lot of GBP/USD. Therefore, the facilitator can earn thousands of dollars in a day.
How to minimize the forex spread?
To minimize your forex spread, you have to use some trading strategies. Firstly try to trade during the busiest trading hours when many sellers and buyers work in the stock exchange. As the traders will increase for a specific currency pair, the competition will increase too. Therefore, the facilitator can reduce their forex spread to get more clients.
Secondly, avoid trading unpopular currencies because the market competes after popular coins such as Euro/USD pair. And more competition will lead to a low forex spread.
The Bottom Line
You have now understood what is spread in forex and also know how to calculate spread. So apply this info to catch forex with low spread to gain more profit and business.
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