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 does a double bottom tell a trader about the overall trend?

    Learn how a double bottom pattern forms on a price chart and why many traders consider double bottoms to be a sign of reversal ...
  2. What are the main differences between a double top and a double bottom?

    Identify double tops and double bottoms, and learn what each could mean for the security's current price trend. Discover ...
  3. What are common trading strategies used when identifying a double bottom

    Use simple, low-risk trading strategies to take advantage of a double bottom formation. Traders typically take one of these ...
  4. What are the most common divergence strategies implemented in forex trading?

    Discover common divergence strategies that utilize either stochastics or the MACD, the two most frequently used momentum ...
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. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...

You May Also Like

Related Articles
  1. Forex Strategies

    How to Build A Forex Trading Model

  2. Trading Systems & Software

    The Best Technical Analysis Trading ...

  3. Trading Strategies

    Is the Stock Correlation Strategy Effective?

  4. Trading Strategies

    Not All Online Trading Brokers Are Created ...

  5. Trading Strategies

    Novice Trading Strategies

Trading Center