How to Calculate Spread in Forex

How to calculate spread in Forex Trading?

Have you ever had open trade that has been closed out before cost actually reached your stop loss level?

Or maybe seen cost reach your trade profit target level, but the trade never closed in profit?

If you set up a pending buy order at a key level, the market does reach your price level on the chart but the trade never gets triggered.

If you're thinking about yourself, "What the hell is going on here?" You starting blame your broker or start cursing the market fuelled with frustration.

You become a ware that this is a recurring problem and you really start coming up with scheme theories about your broker and about the market, thinking they are out to get you and they are making it as hard as possible to profit in trading.

What you are fault to do is effect in the market spread into your trade levels. A professional trader always account for the spread otherwise you will experience one day that these inconsistencies with trades not activate or stops being activated before they were hit.

Now we are going discuss the difference between BID and ASK, what the market spread is explain how you should effect in the spread to your trade levels to stop from these mishaps.

BID and ASK Prices

It is crucial like a professional trader that you understand the difference between BID and ASK prices, fault to do so will mean you will no doubt make potentially costly errors when setting up your trades.

When you look at your trade order screen you will see two price quotes, that is BID and ASK prices. Every time you place a trade BID and ASK price quotes come into play. It's important you are fully careful how they will affect your trade order when you execute it.

The BID Price

The BID price is something that you will be very familiar with that The BID price is that price you see on the charts so suppose if EURUSD was printing in 1.300 on your chart then the BID price is also 1.300.

The BID price is the price that is that what you deal with every time you press that sell button because it's the price your broker is willing to buy the currency off you. You are selling the currency to your broker at the BID price.

The ASK Price

The ASK price is where things get a one little more complicated, the ASK price is very responsible for causing those unexpected troubles in your trade orders.

You don't see the ASK price when you have open your charts, it's only when you open your trade order window of the ASK price pops up on the screen.

The ASK price is that what your broker is prepared to sell you the currency, and it's a totally different price than what you see on the charts. The ASK price is what you deal with every time for the BUY button is pressed and it's more expensive than the BID price you are looking at on the chart.

So ASK price is the price that your broker is always asking for to buy the currency of them. The BID price is may be 1.300 on the charts but your brokers ASK price may be something like this 1.303. This is where calculated Forex spread comes into the play.

During Calculate Spread to Avoid the Confusion

Like a retail trader you require to have an account with a broker to be able to interact with the market, there is really no method around this, it's just a fact of trading.

May be you think that, "Oh how nice of this broker to ease the means for us retail trader at home to be able to place trades on the global market.

A Forex broker is the business; they give a service with the objective of turning over a profit. So think where are these profits coming from? Your brokers don't ASK you for monthly fee to have an account open, how do they make money from trading?

They make money through the forex market spread they've created.

BID and the ASK price is different from spread. It's all in ASK price for them, every time you make any transaction that deals with the ASK price the broker makes money.Many brokers likes high frequency traders which place by every trades every day, because each and every transactions produces the broker profit, regardless whether the trader loses or profits the trade. So, you can calculate the spread with subtracting the BID price from the ASK price. Like this ASK — BID = Spread.

Forex has become exponentially famous from last few years, with more and more Forex accounts being opened each and every day. This means if more brokers, and that means more competitions between them. Every brokers want you to have your trading account with them so, they want to provide your trades and they will go to maximum lengths to get you like a customer.

Broker market has become extremely competitive, and they are fighting each other for our business like a trader. This is good for us traders because this keeps their spread prices little down. Nobody wants to have an account with a broker who has charges expensive ASK prices, so thanks to the high demand trading is relatively on low price.

But we still require to know how to deal with the in BID and ASK prices when we place our trade with order, even though most of the time the difference is only a some few pips.

Factor in the spread when placing a trade order

When we placing orders, you require to remember two key rules. It's important that you memorize these two rules because you will require to apply them every time you enter and exit in a trade.

When you go long in trading, you enter the market at two times the ASK price and exit the market at BID price.

When you go short in trading, you enter the market at the same two times BID price and exit at the ASK price.

Long Trade

Suppose if you wanted to set a pending order to go long when EUR/USD hits 1.300 on the graph, you don't place the pending order entry price at 1.300. Remember the all rule for long trades, you 'enter the market on the ASK price' because the ASK price what your broker is ready to sell you the for currency. When you are the buyer the ASK price is quoted.

This means when the market reaches at 1.3000 you have to expect where the ASK price will be at that point in time.

If your broker's spreads are roughly 2 pips for EUR/USD, when the market reach at 1.300 your broker is going to be 'asking' 1.302.

So when the prices on the graph reach at 1.300, this is the BID price, your broker will be ready to sell the currency for 1.3002 when the spread is 2 pip.

If you're pending order at any entry price of 1.300, then your trade will not be activated because your broker is not ready to sell you the currency for that price at that time. To be activated in you would require waiting for the BID price to reach 1.298, which at that point in time the broker's ASK price will be 1.300 and your trade also filled.

Order to be activated in when the BID price reach at 1.300 you require adding the market spread to this price and set your entry order at the 1.302.

When you calculate spread and add it to in buy order with the intention of entering the market when the graphs hit at 1.300, your entry price is placed at 1.302. When the market reach at 1.300 you will be activated into the trade.

Stop loss and exit prices for long orders.

We need to refer early statement.

When you go long in trading, then you enter the market on the ASK price and exit the market on BID price.

This makes setting stop losses and prey levels really easy. You are exiting at the BID price, this is the price your broker is ready to buy the currency back of you and they are only ready to pay the prices they can easily get from the Interbank Market.

When you exit in the trade you sell the currency back to them. This uses for the BID price.

The BID price is that what you see on the charts and there is no commission elaborated, so you set the stop and prey levels directly off the BID prices you see on the charts.

Short Trades

Things are in reverse, when you are trading with selling transactions, so let's mention back to the rule for selling.

When trading with short trade orders, things have to be worked the other method around.

Short trades enter the market by the BID price, so any price is on the chart you want to short from you use that price in your short entry order.

Whenever, with the stop loss and prey prices on short trade we require to calculate Forex spread and factor it in, because we are going to be exiting the trade by the ASK price. The ASK price is expensive than the market BID price because of the brokers commission.

Like when trading with the ASK price in your buy entry orders, you simply require to add the market spread onto your stop loss and prey prices for your short orders.

Broker's ASK price can stop you out of your trade before the chart price and BID hits your stop loss. Technically your stop was hit on BID price, because you exit at the ASK price, it's just that the ASK price is not normally shown on your candlestick chart.

Avoid your trades from being stopped out earlier than expected, do the always right thing, calculate Forex spread and include it onto your stop loss value. Doing so will allow your trade to easily move all the way to its stop loss level before the actual stop is triggered.

We wanted to be stopped out if the on BID price entered 1.310, so we included the market spread and place our stop loss order at 1.312. We know when the BID price was 1.310 the ASK price would be 1.312 and we were taken out of the trade at the correct level.

You must calculate Forex spread and also apply it to your short order prey levels. You are exiting at the ASK price. So search your desired prey price on the charts, add the market spread to that price and use that in your prey price level for on every short trade order.

Now you know how to right place trade orders and enter a Forex trade the right method. You won't be blowing with temper because your pending gets activated, and your trades exit at the deliberate price levels.

How to Calculate Spread in Forex

Source: https://medium.com/@masterecnfx/how-to-calculate-spread-in-forex-trading-51dc6b97f18c

Share this post