A forex spread is a difference in prices between two currencies. While it may seem strange, there's a cost to exchanging currencies, and this cost is part of what you see on your exchange receipt. Forex spreads vary from one bank to another, though they tend to be around +/- 2 pips from market rates.
This means if currency pairs have a three pip spread, the buy price will be 1.0805, and the selling price will be 1.0807 - a 0.0002 difference that amounts to 0.2%. If an individual were trading 100k, he would receive 97,400 instead of 98,000 - a loss of 600.
Traders can deal with forex spreads in Singapore in a few different ways. One way is to base the calculation on the bid-ask spread of each currency pair, or another is to use the pip value method. The most common method is likely to calculate using the bid-ask spread because it can quickly be done manually without having prior knowledge of the underlying market's activity.
This article will explain how it works for both beginners and intermediates alike. Let us begin by understanding what each term means first before looking at how it works.
What are forex spreads?
Forex spreads are the difference between the price at which a dealer is willing to buy and sell currency. The size of this spread determines how competitive or difficult it may be to enter into a trade, more so than with stocks because every single one of these trades will require you to pay them.
The bid price
This is what your local bank is selling for in terms of US dollars if you transfer these funds over right now.
The ask price
Just like when buying items in a store, this is what your local bank will buy from you in US dollars.
This means that if there were no forex spread involved in trading, every time you wanted to purchase 1 unit of another currency, assuming these prices are fixed, you would have to sell 1 unit of your home currency for this price.
However, the forex market is not like any traditional market where prices are set by supply and demand because currencies can be printed if there isn't enough available. This means that each country's central bank decides what levels to set its currency at (if not floating freely) to suit its current purposes.
Therefore it is necessary to consider the size of the forex spreads when initiating a trade for profit because these will affect how competitive or unattractive it may be.
Forex spread calculation methods
When learning about forex spread calculation methods, you'll likely come across four different names; pip value, pips cost, easypips and surepips. All of these refer to the same thing, which is the minimum movement of a currency pair before it is considered profitable for forex traders because they're trying to make money.
Pip value and pip cost
The pip value method calculates the spread by multiplying your home currency's base value against another's. In contrast, pips cost enables you to calculate this based on how many pips you aim for when trading.
Surepips and easypips
Surepips and easypips are both online services that offer their users access to trading tools to determine if any given trade would have been profitable or not based on different calculation methods.
They're very popular among beginner traders due to their ease of use and added protection for ensuring you do not lose out on any trade. Still, more advanced traders may not find this necessary because they're most likely already familiar with determining forex spreads themselves.
Forex trading is complicated because it occurs on a decentralized market where little regulation exists, meaning different banks can offer differing prices for the same currency pair. This means forex traders must choose their broker wisely, as they may be able to exploit rates not available elsewhere. We recommend using an experienced and reputable online broker from Saxo Bank and practise your trading strategy on a demo account.