How is spread calculated when trading in the forex market?

By Chris Gallant AAA
A:

First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms of their price in another currency.

In order to express this information easily, currencies are always quoted in pairs (e.g. USD/CAD). The first currency is called the base currency and the second currency is called the counter or quote currency (base/quote). For example, if it took C$1.20 to buy US$1, the expression USD/CAD would equal 1.2/1 or 1.2. The USD would be the base currency and the CAD would be the quote or counter currency.

Now that we know how currencies are quoted in the marketplace, let's look at how we can calculate their spread. Forex quotes are always provided with bid and ask prices, similar to what you see in the equity markets. The bid represents the price at which the forex market maker is willing to buy the base currency (USD in our example) in exchange for the counter currency (CAD). Conversely, the ask price is the price at which the forex market maker is willing to sell the base currency in exchange for the counter currency. Forex prices are always quoted using five numbers; so, for this example, let's say we had a USD/CAD bid price of 120.00 and an ask of 120.05. Thus, the spread would be equal to 0.05, or $0.0005.

To learn about the basics of the forex market, check out A Primer On The Forex Market and Getting Started In Forex.

RELATED FAQS

  1. How do traders identify key signals from the autoregressive moving average?

    See how traders and technical analysts use autoregressive moving averages to create forecasting models, and learn why this ...
  2. What are the main signals traders use when following the Average Directional Index ...

    Learn how the average directional index, or ADX, measures momentum and strength in market trends and how specific signals ...
  3. What are common strategies traders implement when identifying a Bearish Engulfing ...

    Learn how to spot a bearish engulfing pattern, and learn some of the trading strategies you can implement to take advantage ...
  4. What is the disparity index formula and how is it calculated?

    Discover how to calculate the disparity index, a technical indicator used by analysts to measure price movements in a candlestick ...
RELATED TERMS
  1. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  2. ICE LIBOR

    See LIBOR
  3. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
Related Articles
  1. Trading Strategies

    Steps To Becoming A Quant Trader

  2. Trading Strategies

    How Trading Algorithms Are Created

  3. Trading Strategies

    Quants: What They Do and How They've ...

  4. Trading Strategies

    An Introduction To Price Action Trading ...

  5. Leveraged products offer investors the opportunity to get significant market exposure with a small initial deposit. Contracts for difference and spread bets offer two ways to get more leverage.
    Investing Basics

    Getting Market Leverage: CFD versus ...

Trading Center