Pips and spreads are two of the most common terms that the Forex trader uses during daily trading activities. Currency is traded in pairs, hence the difference between the ASK and BID prices offered by brokers. These BID AND ASK prices are closely related to each other. When you are looking for ways of finding low spread costs, the forex brokers that offer free outlets to download Metatrader 5 tend to offer some of the best rates. But before dealing with spreads let’s get a quick review about BID price and ASK price.
BID Price: BID price is the maximum buying price offered by the broker for a certain currency pair.
ASK Price: ASK price is the maximum selling price offered by the broker for a certain currency pair.
Since we are now familiar with the terms BID price and ASK price, let’s understand what the word “spread” actually means. To be precise, a “spread” is nothing but the difference between BID price and ASK price offered by your broker. The spread will vary from time to time unless you are trading on a fixed spread broker.
Still Confused with Spreads?
Let’s break it down. Suppose you are going to trade on EURO/USD pair. The current Bid price is 1.1410 and asking price is 1.1413.So what’s the spread? Subtract the Ask Price from Bid Price. The result is 3 or in another word EURO/USD pair has 3 pips spread. Smaller spread usually indicates higher liquidity of currency pairs.
Facts About Spreads
Depending on the spread of a currency pair, the trader can easily calculate the total spread cost. Suppose you open a trade in EUR/USD with 1$ pip value. The spread the cost for trading this pair is 1*3=3$.This $3 is the amount that your broker will charge for opening the trade. Spread calculation is enormously important if you are scalper or trading in high volume with tight stop loss. A single pip variation may cause a significant amount of loss or profit. So these scenarios need to be managed properly.
Statistical data shows that people tend to trade low spread currency pairs due to high liquidity and low spread cost. Low spread costs allow low execution costs for each trade you open.