Forex Market Spread
To understand better the forex spread And how it affects you, you must understand the overall structure of any forex trading. One way to look at the business structure is that business is conducted through intermediaries who charge for services. This charge, the difference between offer price and asking price for a negotiation, it's called "spread".
FirstRemember that in currency markets investors exchange one currency for another. Therefore, currencies are quoted in terms of price in another currency.
To express this information easily, currencies are always quoted in pairs (for example, USD / JPY). The first currency is called the base currency and the second currency is called the counting or quotation currency (base / quotation). For example, if 101JPY was needed to buy 1USD $, the expression USD / JPY would be equal to 101/1 or 101. The USD would be the base currency and the JPY would be the accountant's quote or currency.
How to calculate the spread in the Forex market?
Now that we know how currencies are quoted in the market, let's see how we can calculate their spread. Forex quotes are always provided with bids and prices, similar to what you see in stock markets.
The offer represents the price at which the market maker is willing to buy the base currency (USD in our example) in exchange for the quote currency (JPY).
On the other hand, the selling price is the price at which the market maker is willing to sell the base currency in exchange for the quote currency.
Forex prices are always quoted using five numbers: For this example, let's say we have a USD / JPY bid price of 101,15 and an order of 101,20. Thus, the spread would be equal to 5.
To learn how to manage and minimize Spread read our next article!