Trading Articles

How To Calculate Spread

29
May

Written by Donna

I will try not to get into any technical points in this article and just get down to it and tell you what you need to know to calculate your own spreads, and even what a spread is. This article is very basic but will hopefully fill in a few blanks for some people, it is surprising sometimes what the simplist new bit of knowledge can do for your understanding.

Spread is quite simply the difference between the price you can buy a currency pair at, and the price at which you can sell it. Sometimes the ‘buy’ is called an ‘ask’ and a ’sell’ is called a ‘bid’- they are basically the same thing, and you will see bid and ask in your metatrader Marketwatch window.

Let’s work through a simplified example to see how spread effects a trade.

Current quote is 93 bid and 96 ask. You might see such a quote written as 93-96.

You want to BUY this currency. Therefore you are forced to pay the higher price, at 96. You buy at 96.  The true ‘average’ price will very likely be somewhere in the middle between the two figures, but the extra is the premium you pay for the priveledge of trading. It also ensures your broker can buy expensive champagne for their staff Christmas parties.

Let’s say you decide you made a mistake, price hasn’t moved anywhere, so you decide to sell and get out. Now you must sell at 93. Since you bought at 96 you have had a net loss of 3. This figure represents what traders call “the spread”.  Spread is measured in a unit called “pips”.

A real world Forex example:-

Things are a little more complicated in the real world.  Firstly you need to determine if your broker is a 4 digit or a 5 digit broker. To do this just count how many numbers you see after the decimal point (.) in your price quotes. For example, 1.3478 is a 4 digit quote, and 1.47836 is a 5 digit quote.

Calculating for 4 digit quotes

This is the easiest. Take a look at this quote:-

1.4598 – 1.4600

What is the difference between these two?  Don’t be frightened by the decimal point as a lot of people are. Actually, just remove it, it’s much easier and you get the right answer.

14598 – 14600

Now what is the difference between the two numbers?

It is 2. The spread therefore is 2 pips. It is that simple!

Calculating for 5 digit quotes

This is a little more complicated but only in that you have to add an extra step. Lets complete the steps as for our 4 digit quotes first. Here is a quote:-

1.45987 – 1.46005

Ignore the decimal:-

145987 – 146005

What is the difference? It is 18.

Now, because we have an extra figure on our quotes, we have to adjust for that. To do so just divide your final figure by 10.

18 / 10 = 1.8  Spread in this example was 1.8 pips

It really is that simple!

Have a go!

Here are a few to practise with. Determine the spread in each of the following:-

a)  0.8865 – 0.8869

b) 1.45870- 1.45984

c) sell price: 1.24670, buy price: 1.24698

d) bid: 1.4580, ask: 1.4589

Scroll down for the answers…..

.

.

.

.

.

.

a) 4 pips

b) 11.4 pips

c) 2.8 pips

d) 9 pips

13 Comments

  1. steve says:
    May 30, 2009 at 1:23 pm

    Very helpful, i never understood this before. The 5 digit brokers threw me right off.

  2. peter says:
    June 3, 2009 at 3:51 am

    just to say kudos. you are doing an incredible job. all your stuff so far has put me in the right direction.
    peter

  3. Brian says:
    June 3, 2009 at 11:47 am

    Donna, Thank you for this easy explanation. How does it work with pairs involving the Japanese Yen: ie- 95.837, or 136.704. Is it calculated the same way, or is it any different? Could you explain? Thank you so much.
    Brian

  4. donnaforex says:
    June 3, 2009 at 11:50 am

    With pairs like USDJPY it is just the same as above. Just remove the decimal and calculate the difference between the two remaining figures. However, unlike 4 digit vs 5 digit brokers, you are looking for 2 digit vs 3 digits- 2 digit brokers have no need to divide by 10, just follow the example for ‘4 digits’ above.. if you have 3 digits after the decimal then follow the instructions for ‘5 digit brokers’- hope that makes sense!

  5. Brian says:
    June 4, 2009 at 4:23 pm

    Thanks Donna,
    As always that makes perfect sense and is very helpful. Thank you.
    Brian

  6. Kandan says:
    June 12, 2009 at 8:50 pm

    Hi donna: i am new to forex and fapturbo and happy to see your wonderful forum guiding other forex traders alike. what settings should I start with?

  7. Henry Victor says:
    June 15, 2009 at 12:42 pm

    Donna I am a fan of all of your posts, great explanation. Thanks for your hard work

  8. joel says:
    June 17, 2009 at 4:40 pm

    Tis is my first time to your site and it is great .Like the way you explain all the answers ask to you. I am learning alot.People like you make this a much better expierence and your willingness to really help shows through.Joel

  9. Randy R says:
    June 28, 2009 at 2:48 am

    Awesome! As a newbie, any and all “basics” are very much appreciated. The simpler the better. Thanks.

  10. donnaforex says:
    June 28, 2009 at 7:43 am

    thanks for the nice comments!

  11. gctex says:
    August 12, 2009 at 3:27 am

    Donna,

    Thanx for this.

    For 4/5 digits, isn’t it enough to just multiply the net difference (without removing the decimals) by 10,000 ?

    And for yen, just multiply the net difference (without removing the decimals) by 100.

    Thanx

    -Rahman

  12. Mike says:
    August 28, 2009 at 4:24 am

    Good info – but if using FAPTurbo with a 5 digit broker, it seems that this throws off the settings. The take profit setting on the USDCAD is 10, but on the trade it opened, the buy price was 1.08739, and the T/P was 1.09160 – which is no where near 10? With my 4 digit broker, the T/P column always matches the setting.

  13. CHRIS BRIGHT says:
    September 1, 2009 at 1:07 pm

    HI DONNA,
    NICE WORK YOU ARE DOING TO EDUCATE PEOPLE ON WHAT THEY NEED TO KNOW ABOUT FOREX. I WAS INTRODUCED TO FOREX DIAMONDS FOR SIGNALS, PLEASE I WANT TO KNOW HOW REALISTIC THAT SITE IS BEFORE I PART WITH CASH. THANKS

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