Trading forex, one of the most crucial things is the spread. Of course, you will want to find the broker with the best forex spreads. The question on many people’s mind though is often, how to calculate spread in forex to begin with.
Here we will lead you through exactly how to do this along with noting any exceptions to the general rule. This way, you can be sure to know you are getting the very best deal.
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How to Calculate Spread in Forex
When calculating the spread in forex, the most important thing you need to remember is that 1 pip will be equal to the 4th digit after the comma, or the 4th decimal place. For the following example, we will take a look at the most commonly traded pair on the forex market, the USD/EUR.
If you have a sell price of 1.12496, and a buy price of 1.12500, we can see that the difference is 0.00004. Taking our method above with the fourth number after the comma, this means the spread is equal to 0.4pips.
JPY Currency spreads: An exception to the rule
Of course, there is an exception to the rule. In this case, that exception is the Japanese Yen. The value of one pip on JPY is calculated by taking the second digit after the comma, or the third if you have a fractional pip.
In this example, let’s look at the USD/JPY. With a sell price of 110.043, and a buy price of 110.050 we can calculate that the difference is 0.007. This means your spread on the pair is 0.7 pips.
Calculate the cost of spread: from pips to actual money
Now that you know how to calculate the spread in pips, you will want to know how to convert this to actual money to determine your costs.
For the purpose of this example, let’s use a standard lot of USD. This is $100,000 since a standard forex currency lot is 100,000 units. Within the example, let’s also presume that the spread is 1 pip. This means that for every US Dollar, the spread would be equal to $0.0001. To get you full costs from this, simply multiply it by the lot volume. In this case, that is 100,000 leaving you with a $10 spread in total.
Calculate spread forex: Forex spread indicators
As a forex trader, there will be many tools and indicators you can use from a top broker in all aspects of trading. A forex spread indicator is the perfect way to help you visualize this. This will usually be shown as a line on a chart showing the direction and size of a spread as you can see below.
This picture is taken from the Oanda MT4 trading platform and the spread here is 0.6 pips. It shows the black line as the sell price, and the red line as the buy price so you can determine the spread.
Spread forex: Factors that influence and change forex spread
There are a wide variety of factors that can impact the spread on a particular forex pair. Here though, are a few of the most common reasons why a spread may move.
Trading volume is very important in keeping the spread as low as possible. When the market has more liquidity, that is that trading volumes are higher, the spread will typically be lower. This is something you can see on major currencies that have a very low spread.
Any number of economic and political events can also move the spread. These can typically act to widen the spread in many cases. Volatility in the price will also usually translate to wider, and more unpredictable spreads.
Depending on how much a forex spread widens, you may even receive a margin call. This is to inform you that your account value has dropped below the required level, and in the worst cases could lead to your broker closing your position.
How to Calculate spread in forex: FAQ
How is forex spread price calculated?
To calculate the forex spread price you have to multiply the cost per pip by the total volume of currency you are trading. In the case of a standard lot, this would be 100,000 units per 1 lot as shown in our example above.
How are pips calculated?
The simplest way to get the value of a pip presuming that you are trading on a standard lot is to divide 0.0001 by the exchange rate. The only exception here applies if you are trading JPY where you would divide by 0.01.