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. What are the advantages and disadvantages of using systematic sampling?

    Learn about the primary advantages and disadvantages of using a systematic sampling method when conducting research of a ...
  2. How effective is creating trade entries after spotting a Tri-Star pattern?

    Learn about the tri-star pattern and how to use corroborating reversal signals from other technical indicators to build effective ...
  3. How do I close a long position in forex?

    Learn the different ways that traders close out existing long positions in the forex market, depending on whether their brokers ...
  4. How important are descending tops for a trading strategy?

    Find out what it means when a security or indicator is showing a descending tops pattern on a price chart, and what it says ...
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Forex Spread Betting

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

    See LIBOR
  6. WM/Reuters Benchmark Rates

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

You May Also Like

Related Articles
  1. Chart Advisor

    Watch These Stocks for a Breakout

  2. Chart Advisor

    Invest in Japan with this ETF

  3. Charts & Patterns

    How to Analyze Pharma Stock Fundamentals

  4. Investing Basics

    Market Simulators: How To Outperform ...

  5. Mutual Funds & ETFs

    Invest in Emerging Market Currencies ...

Trading Center