Forex Spread Explained: How to Calculate and Minimize It

One of the components of a profitable partnership is spreads, which may or may not be profitable for a trader. Therefore, it is necessary to know how to calculate spread in Forex and how to manage it in your favor.

How to Understand the Spread in the Forex Market

To easily catch the meaning of spread and in whose favor it works, just imagine an ordinary market in which there is no intermediary:

1. The seller tells you the cost of the goods.
2. You bid your price below the seller's one.
3. If you are lucky enough, you will bring down the price and save on your purchase

In Forex, everything works differently because of the intermediary in the form of a broker. The difference between the price that the seller sets (Ask) and the price that the buyer offers (Bid) is not leveled as a compromise, as in the usual market, but goes to the broker as a commission for its services. Therefore, traders are interested in low spreads, because the lower it is, the more profit you can get from a potential transaction.

Picture 1 of Forex Spread Explained: How to Calculate and Minimize It

What Is the Rule of Forex Spread Calculation?

Since the spread is one of the key indicators that determine the profitability of conducting foreign exchange transactions with brokers, you can easily find summary tables in which they are presented. There, you will see the spreads expressed in pips for the currency pairs you are interested in at different brokers.

However, it is better to know the very simple spread calculation rule to determine it independently at any time. The spread calculation is made by subtracting the bid price from the ask price. On the chart of a currency pair, you can easily see both prices ‒ the ask and the bid. The difference between them is the spread.

Why Traders Try to Minimize the Spread

If the spread is just a broker's commission, why do traders try so hard to find ways to minimize it? The answer lies in direct proportion between the number of deals you make and the amount of money you pay to the broker — the more transactions you make on the broker's platform, the higher the deductions in its favor:

1. If a trader makes a small number of deals, the spread may not bother them too much.
2. But if you want to try scalping, when dozens and even hundreds of transactions are made during the day, you will have to give a very large part of your profit to the broker. Sometimes, this figure can reach up to 60% of the total profit received by the trader during the day.

Several Options for Minimizing the Spread in Your Favor

Find out Which Spread is More Profitable

1. For a more accurate calculation of trading strategies, traders are interested in a fixed spread because it is predictable. But at the same time, it should be a narrow spread.
2. A floating spread adds uncertainty to your calculations and, therefore, makes trading more risky.

At the same time, it is important to remember that brokers can expand even a fixed spread for a while due to sharp fluctuations in the exchange rate.

Use the Best Robots with Special Features

Turning to the help of an automated trading adviser, you will receive many advantages in Forex trading. Even the simplest robots will help you trade according to the algo signals, which will accurately predict trend reversals. And more advanced ones will offer many additional possibilities, including spread control features. Using the best robots offered in ForexStore https://forexstore.com/best-forex-robots, you will earn more money regardless of the news background and order volume.

Choose the Right Currency Pairs for Trading

When trading various assets, including currency, you can note one important regularity:

1. Highly liquid markets attract a large number of participants.
2. A large number of buyers and sellers who actively enter into transactions make the market liquid.

Therefore, by choosing currency pairs with high liquidity, you are guaranteed to get a tight spread, even if it is not fixed.

Mastering the techniques of spread minimization is essential for many Forex strategies, including highly profitable and popular scalping. To succeed in this regard, use both your knowledge and the impeccable skills of Forex EA, who will always find a way to get the best deal for you.

Micah Soto

Update 07 July 2023