Definition and examples of currency pair spreads

Posted on 2023-04-16 Updated on 2023-04-16

In forex trading, the spread refers to the difference between the bid price and the ask price of a currency pair. The bid price is the highest price a buyer is willing to pay for a currency pair, while the ask price is the lowest price a seller is willing to accept for the same currency pair. The spread is essentially the cost of trading, and it is typically measured in pips (the smallest unit of price movement in a currency pair).

For example, if the current bid price for the EUR/USD currency pair is 1.2000 and the ask price is 1.2005, the spread is 5 pips. This means that if a trader wants to buy EUR/USD, they would need the price to move up by 5 pips just to break even on their trade. Similarly, if a trader wants to sell EUR/USD, they would need the price to move down by 5 pips just to break even.

Spreads can vary widely depending on the currency pair being traded, the time of day, and the liquidity of the market. Major currency pairs, such as EUR/USD, typically have tighter spreads than exotic currency pairs, such as USD/ZAR, which tend to have wider spreads due to lower liquidity.

In addition to the standard or fixed spread, there are also variable spreads, which can fluctuate based on market conditions. Some brokers also offer commission-based pricing models, where the spread is typically lower but the trader pays a commission for each trade.

Understanding the spread is an important part of forex trading, as it can have a significant impact on a trader's profitability. Traders should choose a broker with competitive spreads and be mindful of the spread when placing trades.

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