The spread will always be there when you engage in foreign exchange trading. However, traders usually do not make efforts to understand how they can calculate the spread in pips. In some cases, you should consider doing so if you trade with the help of a proprietary company.
To achieve success under such conditions, you must comply with specific limitations regarding the use of leverage, drawdowns, and other important aspects. In this regard, it becomes vital for you to learn more about How to Calculate Spread in Forex in pips. Let us explore the matter.
What Is Spread in Pips?
The spread is an integral element that you should pay attention to when you try to earn money. To calculate it, you need to subtract one price from another:
Bid price (the price you can sell at)
Ask price (the price you can buy at)
This gap is measured in pips and is the main unit used when you deal with foreign exchange. For example, in most currency pairs:
1 pip = 0.0001
Why Prop Traders Need to Care (A Lot)
Spreads do indeed play an important role in case you trade on a personal account, but in case of a prop trader, spreads may become the decisive factor in your overall performance.
Why? Because:
You usually target specific gains
Your drawdown is constrained
The majority of prop traders base their trades on exact entry points
Spreads may become an issue because of:
Disturbing the risk-to-reward ratio
Causing stop losses to be activated too soon
Reducing your advantage
In short, ignoring spreads is like trading with hidden friction.
Step-by-Step: Calculating Spread in Pips
Let’s get practical. This is where everything clicks.
Step 1: Find the Bid and Ask Price
On your trading platform (like MT5), you’ll always see two numbers.
Example:
- Bid: 1.2500
- Ask: 1.2503
Step 2: Subtract the Prices
Use this simple formula:
Spread = Ask – Bid
So:
1.2503 – 1.2500 = 0.0003
Step 3: Convert to Pips
Now convert that number into pips.
Since 1 pip = 0.0001:
0.0003 = 3 pips
That’s your spread.
The Faster Way (What Experienced Traders Do)
After some time, you will no longer need to remember all those formulas.
All you have to do is check the final digits:
- 1.2500 → 1.2503 = 3 pips
- 1.1845 → 1.1846 = 1 pip
It becomes instinctive—and really, it should be.
Example of Real-Life Trading (Because It Will Make Sense This Way)
Assume that you are trading the EUR/USD currency pair:
- Bid: 1.1000
- Ask: 1.1002
- Spread: 2 pips
You place your buy order at 1.1002.
Now, let’s assume that there is a slight upward move in price:
- Bid: 1.1003
- Ask: 1.1005
When you close your position, you do so at 1.1003.
Thus:
- Entry: 1.1002
- Exit: 1.1003
- Profit: 1 pip
Even though the price moved 3 pips, you only captured 1. The spread took the rest.
That’s the reality most traders underestimate.
Where Traders Get Confused
We will try to dispel some myths regarding this.
"The market has moved 5 pips, how come I only made 5 pips?"
Because you started at a loss since the spread.
"Spreads are of no consequence in larger transactions."
True, but they can pile up after some time.
"Larger spreads mean larger profits."
No, low spreads help reduce friction—but you still need a proper trading approach.
The Importance of Timing in Trading
However, spreads are not always stable (unless there are some exceptions).
Let us get a broader view on this matter:
- London Market Session: Low spreads
- New York Market Session: Also high liquidity
- Asian Market Session: Moderately wider spreads
- Market News: Wider spreads are anticipated
In case there is any news concerning your transaction, that 2-pip spread will definitely widen to 10 pips. No small difference at all.
Strategy + Spread = Real Performance
Scalpers
When scalping between 5-8 pips, a spread of 2-3 pips is huge. You're effectively giving up much of your earnings potential.
Intraday Traders
While you have more wiggle room, the spread will still impact your entry and exit decisions.
Swing Traders
Here, the effect of the spread is less, but it's an important element in your costs.
Conclusion: Always ensure that your trading strategy is well-matched to the prevailing spread conditions.
The Secret That Most Traders Overlook
Though everyone will ultimately type “How to Calculate Spread in Forex” into Google, the magic is in executing it.
In a forex funded account, you are not merely calculating the spread anymore. You are using it to:
- Perfect your entries
- Optimize your stop losses
- Stay consistent
This is where you have the advantage, not because of knowledge, but execution.
A Small Habit That Could Boost Your Trading
You need to always assess the spread when entering into any trade.
Here are some of the questions you should ask yourself:
Is it wider than normal?
Does it affect your risk vs reward?
Are you trading at the wrong time?
It’s quick and can save you from entering into a bad trade.
Common Pitfalls You Need to Avoid
This needs to be kept practical.
Excluding the spread from your backtest
If your strategy does not account for spread, then you have an incorrect backtest.
Entering the market right before major news announcements
The spread widens unpredictably.
Taking trades where the target range is too small.
Conclusion
Measuring spread in pips is not a difficult process. It is among the easiest topics in forex trading. However, knowing how to effectively utilize this concept is where many traders stumble.
In professional trading through a prop firm, you operate in a controlled and regulated environment. You need every pip for survival.
Instead of ignoring spread and considering it as mere statics, begin viewing it as the inherent cost that can be reduced and worked around.
By doing so, you will find that your trades are not only improved but also make much more sense.
