How is the Spread Measured in Forex?

How is the spread measured in forex?

The spread is measured in pips.

A pip is the smallest unit of the price movement of a currency pair.

For most currency pairs, one pip is equal to 0.0001.

An example of a 2 pip spread for EUR/USD would be 1.1051/1.1053.

Currency pairs involving the Japanese yen are quoted to only 2 decimal places (unless there are fractional pips, then it’s 3 decimals).

For example, USD/JPY would be 110.00/110.04. This quote indicates a spread of 4 pips.

What Types of Spreads are in Forex?

The type of spreads that you’ll see on a trading platform depends on the forex broker and how they make money.

There are two types of spreads:

1. Fixed
2. Variable (also known as “floating”)

Fixed spreads are usually offered by brokers that operate as a market maker or “dealing desk” model.  Variable spreads meanwhile are offered by brokers who operate a “non-dealing desk” model.

What are Fixed Spreads in Forex?

Fixed spreads stay the same regardless of what market conditions are at any given time.  Fixed spreads don’t change.  They stay the same.

Brokers that operate as a market maker or “dealing desk” model typically used fixed spreads.

Using a dealing desk, the broker buys large positions from their liquidity provider(s) and offers these positions in smaller sizes to traders.

This means that the broker acts as the counterparty to their clients’ trades.

Having a dealing desk, allows the forex broker to offer fixed spreads because they are able to control the prices they display to their clients.

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