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What is a good spread in trading?

The spread might normally be one to five pips between the two prices. However, the spread can vary and change at a moment's notice given market conditions. Investors need to monitor a broker's spread since any speculative trade needs to cover or earn enough to cover the spread and any fees.

investopedia.com - How Is Spread Calculated in the Forex Market? - Investopedia

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Investing in the forex markets involves trading one currency in exchange for another at a preset exchange rate. Therefore, currencies are quoted in terms of their price in another currency. The forex spread is the difference between the exchange rate that a forex broker sells a currency, and the rate at which the broker buys the currency. The foreign exchange market, with its daily trade volume of $5 trillion, has many participants, including forex brokers, retail investors, hedge funds, central banks, and governments. All of this trading activity impacts the demand for currencies, their exchange rates, and the forex spread. Key Takeaways The forex spread is the difference between a forex broker's sell rate and buy rate when exchanging or trading currencies. Spreads can be narrower or wider, depending on the currency involved, the time of day a trade is initiated, and economic conditions. Brokers can add to or widen their bid-ask spread, meaning an investor would pay more when buying and receive less when selling.

Understanding Forex Trading

Forex trading or FX trading is the act of buying and selling currencies at their exchange rates in hopes that the exchange rate will move in the investor's favor. Traders can buy euros, for example, in exchange for U.S. dollars at the prevailing exchange rate–called the spot rate–and later, sell the euros to unwind the trade. The difference between the buy rate and the sell rate is the trader's gain or loss on the transaction. Before exploring forex spreads on FX trades, it's important to first understand how currencies are quoted by FX brokers.

How Currencies Are Quoted

Currencies are always quoted in pairs, such as the U.S. dollar versus the Canadian dollar (USD/CAD). The first currency is called the base currency, and the second currency is called the counter or quote currency (base/quote). For example, if it took $1.2500 (Canadian dollars) to buy $1 (U.S. dollar), the expression USD/CAD would equal 1.2500/1 or 1.2500. The USD would be the base currency, and the CAD would be the quote or counter currency. In other words, the rate is expressed in Canadian terms, meaning it costs 1.25 Canadian dollars to buy one U.S. dollar. However, some currencies are expressed in U.S. dollar terms, meaning the USD is the quote currency. For example, the British pound to U.S. dollar exchange rate of 1.2800 would be quoted as $1.2800 (dollars) for every British pound. The pound is the base currency and would be abbreviated as GBP/USD. The euro is also quoted as the base currency so that one euro at an exchange rate of 1.1450 would mean it costs $1.1450 (in dollars) to buy one euro. In other words, the EUR/USD would be quoted by a broker as $1.1450 to initiate a trade.

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How the Spread Is Calculated in the Forex Market

Now that we know how currencies are quoted in the marketplace let's look at how we can calculate their spread. Forex quotes are always provided with bid and ask prices, similar to what you see in the equity markets. The bid represents the price at which the forex market maker or broker is willing to buy the base currency (USD, for example) in exchange for the counter currency (CAD). Conversely, the ask price is the price at which the forex broker is willing to sell the base currency in exchange for the counter currency. The bid-ask spread is the difference between the price a broker buys and sells a currency. So, if a customer initiates a sell trade with the broker, the bid price would be quoted. If the customer wants to initiate a buy trade, the ask price would be quoted. For example, let's say a U.S. investor wants to go long or buy euros, and the bid-ask price on the broker's trading website is $1.1200/1.1250. To initiate a buy trade, the investor would get charged the ask price of $1.1250. If the investor immediately sold back the euros to the broker–which would unwind the position–the investor would get the bid price of $1.1200 per euro (assuming the exchange rate hadn't fluctuated). In other words, the speculative trade cost the investor $.0050 solely due to the exchange rate's bid-ask spread with the broker.

How Forex Spreads Are Quoted

Below is an example of how a broker's quote for EUR/USD might look with the bid-ask spread built into it.

investopedia.com - How Is Spread Calculated in the Forex Market? - Investopedia

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