What is the Bid-Ask Spread in Forex Trading?

The forex market isn’t too dissimilar to other financial markets. For example, when an investor is looking to buy a stock, they’ll notice a bid and ask the price displayed on the trading platform. The bid-ask spread, in this regard, is the difference between these two price points.

In simpler terms, it represents what a purchaser is willing to pay to acquire a stock versus what a seller is willing to accept to part with it. The bid-ask spread represents the broker’s commission for executing your trade.

The Importance of Spreads

Understanding spreads can help you get a better view of your transaction costs and overall trading costs. Spreads are measured in pips – small unit movements in the price of any given currency pair. They’re represented by the last decimal point on a price quote.

For most pairs, this is equal to 0.0001 apart from the Yen, whose pip is the 2^nd decimal point (0.01). When a wider spread is present, it means the difference between the buy price and the sell price is quite significant. As a result, there’ll be low liquidity and high volatility.

Tight spreads can improve your profitability, especially when employing day trading and scalping strategies. To learn more about the importance of spread, visit Audacity Capital today.

How to Calculate the Pip Cost for Different Currency Pairings

To obtain the value of one pip for any given currency pair, you need to divide one pip (in decimal point) by the prevailing exchange rate. Take the result and multiply it by the notional amount of the trade in question.

Bid Ask Spread Formula

The bid-ask spread formula helps you compute the “surplus” of the buy price over the sell price. It works by subtracting the two prices. As such,

Bid Ask Spread = Ask Price – Bid Price.

The bid price, in all cases, is always lower than that of the ask price. It’s something that comes naturally, as no seller will refuse an offer that represents a price of greater value than their requested price.

Fixed vs Variable Spreads

Fixed Spread

A fixed spread, as its name suggests, will remain the same throughout the trade no matter the conditions the market may give. This way, you’ll remain aware of how much you’ll pay in transaction costs for the trade.

Fixed spreads provide predictability. Another good thing about them is that your broker won’t be able to widen the spread regardless of what happens in the market.

Variable Spreads

Variable spreads, unlike fixed spreads, are always changing. When dealing with variable spreads, it means that the difference between the buy price and the ask price will keep changing as the market conditions change.

These spreads are typically provided by non-dealing desk brokers. What this means is that they can be narrower during periods of high liquidity.

Raw Spread vs Standard Spread

Raw Spread

A raw spread is the difference that exists between the buy price and the ask price for any currency pair without additional markups. It provides the trader with access to the interbank market, where they can source prices from liquidity providers.

Its advantages include fast market execution, low trading costs, and unmatched transparency.

Standard Spread

A standard spread account is an account that provides the trader with standard trading conditions. Traders using this account get access to varied markets such as commodities, stocks, indices, and Forex.

Its main advantage is that it provides higher leverage, allowing you to open large trade positions with minimal capital.

Zero Spread

A zero-spread account refers to an account that provides zero or minimal spreads between the buy price and the ask price. For a trader, this means you’ll get access to institutional pricing without having to worry about the added markup often included by the brokers.

But please note that you’ll still have to pay a small commission. Traders prefer to use this account for currency trading because it enables them to make precise calculations of the costs involved early on. Moreover, it’s a low-cost option compared to other accounts.

Choosing a Broker with Fair Spreads

When engaging in forex trading, the cost of trading is one factor you can’t afford to ignore during your search for a broker. One such cost is the bid-ask spread. You’ll want to choose a broker who provides a competitive spread, as it can save you a lot of money.

Other factors to consider are account types, trading volume, and platform features. Visit Audacity Capital today to learn more about its account offerings!

Audacity Capital: Committed to Fair Spreads

Audacity Capital is a prop firm that’s dedicated to providing fair and competitive spreads to its traders across all major currency pairs. Its currency pairs are among the lowest you’ll find anywhere.

Trading with low spreads benefits you in that you’ll be exposed to a low risk and reward ratio. Most professional traders like trading with low spreads as it’s easier to make money with them.

A trader choosing a low spread is one who wants to make money fast without putting much of their capital at risk. In other words, the spread matters because it determines how much you’ll make or lose per trade.

Audacity Capital has narrow, competitive trades, providing the opportunities you need to make money. Click here to visit Audacity Capital and learn more about its competitive spreads.

Conclusion

A spread signifies the difference between the buy price and the ask price (in pips) in any currency pairing. Therefore, a trader who uses low spreads will incur less transaction costs and benefit from better long-term savings.

What this means is that a high-spread trader has no option but to generate higher profits if they’re to offset their trading expenses. For any savvy trader, the spread is one of the most important factors to consider when choosing a broker, as it will significantly affect their gains.

Audacity Broker stands out as a premier broker, providing a feature-rich trading environment characterized by low, narrow spreads. You, too, can benefit from its fair and competitive spreads by signing up here today.