Every market has a spread and so does Forex. It is imperative that new Forex traders become familiar with spreads as this is the primary cost of trading between currencies.
T oday we will review the basics of reading a spread and what the spread tells us in regards to the costs of our transaction. A spread is simply defined as the price difference between where a trader may purchase or sell an underlying asset. Traders that are familiar with equities will synonymously call this the Bid: First we will find the buy price at 1. What we are left with after this process is a reading of.
Traders should remember that the pip value is then identified on the EURUSD as the 4 th digit after the decimal, making the final spread calculated as 1. Since the spread is just a number, we now need to know how to relate the spread into Dollars and Cents. The good news is if you can find the spread, finding this figure is very mathematically straight forward once you have identified pip cost and the number of lots you are trading. That means as soon as our trade is open, a trader would incur 1.
To find the total cost, we will now need to multiply this value by pip cost while considering the total amount of lots traded. Remember, pip cost is exponential. This means you will need to multiply this value based off of the number of lots you are trading. As the size of your positions increase, so will the cost incurred from the spread. It is important to remember that spreads are variable meaning they will not always remain the same and will change sporadically.
These changes are based off of liquidity, which may differ based off of market conditions and upcoming economic data. To reference current spread rates, always reference your trading platform. Forex Spreads and the News 26 of Interested in learning more about Forex trading and strategy development?
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Click here to dismiss. What Does a Spread Tell Traders? Talking Points Spreads are based off the Buy and Sell price of a currency pair. Costs are based off of spreads and lot size. Spreads are variable and should be referenced from your trading software. Foundations of Technical Analysis: Classic Chart Patterns, Part I. Upcoming Events Economic Event.
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