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 I invest or trade market indicators?

    Read about how investors can trade actual market indicators, such as the S&P 500 Index, rather than specific stocks or commodities.
  2. What are the most common market indicators forex traders follow?

    Learn the most common technical indicators that forex traders and currency market analysts utilize to predict likely market ...
  3. What is a common strategy traders implement when using the Wide-Ranging Days pattern?

    Learn about wide-ranging days and how traders use this single-session candlestick pattern to predict trend reversal and create ...
  4. What is the difference between pips, points, and ticks?

    Learn the differences between points, ticks and pips and how each are used by investors to measure price changes in stocks, ...
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. Mutual Funds & ETFs

    How do I invest or trade market indicators?

  2. Chart Advisor

    Is Now the Time to Invest in North America?

  3. Chart Advisor

    These Oil Service Stocks Are Ready For ...

  4. Trading Strategies

    The Top Five Stocks For Novice Swing ...

  5. Options & Futures

    Advantages Of Trading Futures Over Stocks

Trading Center