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In the Forex market, the spread is the difference in pips between the bid price (purchase price) and the ask price (sale price) for a given currency pair such as EUR/USD. Spread is the way that many Forex brokers use to obtain benefits for each transaction that their clients (traders) make through their trading network in the market. For example, at any given time, a broker may be paying a price of 1.3500 to buy or sell EUR/USD; however, this same broker will allow its clients to buy the currency pair at 1.3501 or sell it for 1.3499.
As we know, the quoted price for any currency pair is expressed by means of the combination of the symbols of the two currencies that make up the pair and the bid and ask price as shown below:
-Base Currency/Quote Currency | Bid Price/Ask Price
Thus, if at a given moment, the price for the euro against the US dollar is equal to 1.3500-1.3502, this price is expressed as follows:
-EUR/USD = 1.3500/1.3502
Bid is defined as the maximum price at which the market is willing to buy, which is why it is also recognized as the purchase or demand price. Therefore, it is the price at which the trader will enter the market if he is selling the currency pair.
Ask is defined as the minimum price at which the market is willing to sell, which is why it is also identified as the sale or offer price. Therefore, it is the price at which the trader will enter the market if he is buying the currency pair.
The difference between the Bid price and the Ask price is what is known as the spread. The spread is expressed in points, and in the case of the Forex market in pips. In the case of the previous example, the spread for the EUR/USD is 2 points or pips.
How do spreads work?
To better illustrate what spreads consist of in the Forex currency mar… Read More
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