What Is “Spread” in Forex Market?

SPREAD:

How do forex brokers get profit from the trading. This is from spread. Spread is simply the difference between bid or sell price (the exchange rate at which the trader sells the currency) and the ask price (the exchange rate at which the trader buys the currency). Generally the buy price is a little more than the sell price.

Lets say for EURUSD the bid and ask prices are as follows.

Bid Price: 1.2145
Ask Price: 1.2147

If you check the above the difference between Bid and Ask price is 2 pips. Lets say you are trading with a standard lot with a leverage of 1:100. So the 2 pips will be $20. This will be charged by the broker. So if you enter the trade it will show you that you are in a loss of $20 initially as this 2 pips is charged by the broker. This initial spread difference need to be overcome by the trader to come into profits.

If you want to know different common terms like pip, leverage etc check the following.

1. Pip in forex trading
2. Leverage in forex trading

The spread varies for each and every currency pair and it may vary from time to time.

The major currency pairs EURUSD, USDJPY, USDCHF and GBPUSD usually stay between 2 and 5 pips.

Variable and Fixed Spread Brokers:

There are two types of brokers based on the spreads they offer. Variable and fixed spread brokers. Variable spread brokers generally keep the spread small during quite markets but change it during faster and more volatile markets. Constant spread brokers offer a little wider spread but the spread will be constant all the time.

Spread on trading platforms:

Generally the trading platform offered by you broker shows the Bid price and Ask Price using which you can easily see the spread for different currency pairs. For example “Metatrader” is one of the most common trading platform provided by most of the brokers and if you install it you can see the bid and ask prices and you can calculate the spread. Please check the following image.

Bid and Ask prices Of Different Currency Pairs