In forex trading, trades are commission-free; meaning there are no brokerage, exchange or market-maker costs of buying or selling. The brokerage firm benefit from the difference in bid-ask spread. Bid-ask spread is one of the forex basics that every beginner traders should be thorough.

In trading any financial instrument including currency, stocks and bonds, ask is the lowest price the seller willing to accept and bid is the highest price the buyer offer. The bid ask spread is simply the difference between the two. Market liquidity is the main factor determining bid-ask spread for an instrument. Usually the high the liquidity is so narrow the spread. That is why most traded currency pairs like EUR/USD have very tight spreads and exotic pairs have very relaxed spreads.

The bid-ask spread can be calculated from the pip difference of the currency pair. Fore example a EUR/USD quote of 1.3790/1.3792 shows a 2pip difference. Brokerage firms can offer fixed spread for trading specific currency pairs, or can offer different spread according to the liquidity of the market, or can offer fixed spreads when there is liquidity and custom spread on less-liquidity.

This blog is written for Orient Financial Brokers, a leading forex currency broker in UAE offering advanced forex trading software and a range of account features.