This Bid-Ask Spread Calculator calculates the difference between the bid price and the ask price of a currency pair in forex trading. The bid price is the highest price that a buyer (i.e., bidder) is willing to pay for a good, and the ask price is the lowest price that a seller (i.e., asking price) is willing to accept.
This difference, called the “spread,” is measured in pips. A pip is the smallest price move that a given exchange rate can make, and it’s crucial for forex traders as it determines the potential profit or loss in a trade. The number of decimal places in a pip varies: for most currencies, it is 0.0001, but for others (like pairs involving the Japanese yen), it is 0.01.
The formula for the spread in pips is:
Spread in pips = (Ask price - Bid price) * 10^n
where n is the number of decimal places in the prices. This formula essentially converts the difference from a decimal to an integer (e.g., 0.0001 becomes 1 pip, 0.01 becomes 1 pip for JPY pairs).
Here’s an example to illustrate how the calculator works:
Assume we have a EUR/USD pair with an ask price of 1.18010 and a bid price of 1.18000. To calculate the spread, we would:
- Subtract the bid price from the ask price: 1.18010 – 1.18000 = 0.00010.
- Multiply the result by 10^n, where n is the number of decimal places in the prices. In this case, n is 5, so we multiply by 10^5: 0.00010 * 10^5 = 10.
So, the spread for this EUR/USD pair is 10 pips.
This calculator automates this process: you input the ask and bid prices, and it calculates the spread in pips for you. It also automatically determines the number of decimal places based on the provided prices, which allows it to be used for different currency pairs.