When trading forex in Singapore, it is essential to understand how spreads are calculated. Spreads differ between a currency pair’s bid and ask prices and can vary depending on market conditions. In Singapore, forex spreads are typically quoted in terms of pips. Traders can use a few different methods to calculate forex spreads in Singapore.
Bid/ask price
The most common method of calculating forex spreads is through the bid/ask price. The bid price is the price at which a trader can buy a currency pair, while the asking price is how much they can charge for selling it. The difference between these two prices is known as the spread. In particular, if the bid price for EUR/USD is 1.3050 and the asking price is 1.3051, the spread would be one pip.
Mid-price method
Another way of calculating forex spreads is through the mid-price method. The mid-price is simply the average of the bid and ask prices. In our previous example, the mid-price would be 1.30505 (1.3050 + 1.3051 / 2). Traders can calculate the spread by subtracting the mid-price from the bid or ask price.
Last traded price
The last traded price is what a trader last traded a currency pair for in the market. Traders can use this method to calculate forex spreads, but it is not as common as the other two methods. To calculate the spread using the last traded price, subtract the bid price from the last traded price or the asking price from the last traded price.
Average spread
The average spread is another method traders can use to calculate forex spreads. This method takes the average bid/ask spread over a certain period, typically one day. To calculate the average spread, add up the bid/ask spreads for each currency pair over one day and divide by the number of currency pairs.
Why should traders calculate the spread when trading forex?
It can impact your profits or losses
If you don’t consider the spread when trading forex, it can impact your profits or losses. For example, let’s say you open a long position on EUR/USD at 1.3050 with a target of 1.3150 and a stop-loss of 1.2950. The EUR/USD eventually reaches your target, and you close the trade at 1.3149 for a 49-pip profit. However, considering the spread, your actual profit would be 48 pips (1.3149 – 1.3051).
It can help you choose the right broker
When choosing a forex broker, it is essential to compare their spreads to see which is more competitive. Some brokers may have higher spreads but offer other benefits, such as lower commissions or faster trade execution.
It can help you assess your risk
Understanding how the spread is calculated can better assess your risk when trading forex. For example, if you are trading a currency pair with a large spread, you must ensure that your stop-loss is placed far away from your entry price to avoid being stopped prematurely. In contrast, if you are trading a currency pair with a small spread, you will have more flexibility when placing your stop-loss.
How do spreads affect your forex trading?
Wider spreads mean higher costs
If you trade a currency pair with a wide spread, it will cost you more to enter and exit the trade because you will have to pay the spread every time you open or close a position. For example, if you are trading EUR/USD with a three-pip spread, it will cost you six pips (3 pips to enter the trade and three pips to exit the trade) to complete one round trip.
Narrower spreads mean lower costs
In contrast, if you are trading a currency pair with a narrow spread, it will cost you less to enter and exit the trade because you will only have to pay the spread once when you open the position. For example, if you are trading EUR/USD with a one-pip spread, it will only cost you two pips (1 pip to enter the trade and one pip to exit the trade) to complete one round trip.
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