Posted by forex at 6:24 AM
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1. Learn how forex prices work. Currencies trade in pairs. The exchange rate tells you how much of one currency is required to buy one unit of the other. For example, if the euro and US dollar are quoted at EUR/USD = 1.2500, you need $1.2500 to buy one euro. The quote is to four decimal places because the pip for the US dollar is $0.0001 (1/100 cent). Forex brokers set their fees in terms of pips.
2. Look at the exchange rate quoted for a currency pair. You will see two prices listed. The bid is the price the broker will pay you for a currency and the ask is the price at which the broker will sell you the currency. Note that the ask is always a few pips higher than the bid.
3. Subtract the bid price from the ask price to find the spread. The forex broker keeps the spread as his fee/commission. For example, suppose you place an order using U.S. dollars to buy euros. If the ask price is $1.2500 and the bid is $1.2496, the difference of four pips is the broker's share.
4. Multiply the spread by the number of units of currency bought (or sold). A standard 'lot' of US dollars is $100,000. At EUR/USD = 1.2500 one lot equals 80,000 euros. If the spread is four pips (from Step 3), multiply 80,000 times $0.0004 to find the spread the forex broker keeps (in this example it works out to $32).