What is Spread in Forex Trading?
Looking at the image above, you can see that the blue line is the Bid price, the red is the Ask price, the distance is the Spread.
How is the Spread in Forex Trading Measured?
Forex brokers will quote you two different prices for a currency pair: the bid and ask price. The difference between these two prices makes up the broker's revenue.
Spread is calculated: Spread = Ask – Bid.
The spread is usually measured in pips, which is the smallest unit of the price movement of a currency pair. For most currency pairs, one pip is equal to 0.0001.
An example of a 2 pips spread for EUR/USD would be 1.1051/1.1053.
What Types of Spreads are in Forex?
There are 2 types of spreads:
- Fixed Spreads stay the same regardless of what market conditions are at any given time. In other words, whether the market is volatile like Kanye’s moods or quiet as a mouse, the spread is not affected. It stays the same.
- Floating Spread is changing constantly. Spreads will widen or tighten based on the supply and demand of currencies and the overall market volatility.
Currently, most brokers in Vietnam offer floating spreads.
Typically, spreads widen during economic data releases as well as other periods when the liquidity in the market decreases (like during holidays and when the zombie apocalypse begins).
For example: For example, you may want to buy EURUSD with a spread of 2 pips, but just when you’re about to click buy, the U.S. unemployment report is released and the spread rapidly widens to 20 pips!
Spreads widen often when economic news is released. Market Maker can't know exactly whether the news will be good or bad, so to prevent risk, they widen the spread.