What is a spread in Forex?
There are more and more leading forex brokers now emerging, offering great deals, powerful educational infrastructure, and more to attract your business. This is great for you as a potential forex trader if you know some of the key points of forex trading .
One of these key points that you will immediately encounter and which can cause confusion for many is the spread in Forex. In simple terms, it is the difference between the price at which you can buy a currency and the price at which you can sell it. This price difference allows your broker or other market maker to make a profit margin on your trade.
When placing a trade in any currency, you will notice that there are two prices. This is the buy and sell price, or, more simply, the price you have to pay to buy a currency and the amount you will receive for selling that currency. You will notice a slight difference in these prices.
This price difference in many cases indicates the profit of your broker if he is a market maker, although this may not always be the case when you consider the following.
The spread is usually very small and this helps to protect the market maker, who is facilitating the trade, from any large changes in the market between the order and the execution of your trade.
Since almost all of the leading forex brokers offer some form of commission-free and commission-free trading, for some, the spread acts as the only area of profit margin.
There are always two prices in a currency pair: the offer price and the offer price. The bid price is the maximum price that a buyer is willing to pay for a currency pair or security, while the bid price is the minimum price that a seller is willing to pay for the same asset. Both prices are in real time and are constantly updated.
It is also important to understand that when trading Forex, the base currency is displayed to the left of the currency pair, and the variable, quote or counter currency is displayed to the right. Conjugation indicates how much of a variable currency is equal to one unit of the base currency.
The quoted purchase price will always be higher than the specified sales price, with the base market price somewhere in the middle.
The spread is measured in points, which is a small unit of change in the price of a currency pair and the fourth decimal place in the price quote.
Paying the spread is part of forex trading , but many traders don't understand the impact it can have. To get an idea of how much a spread could potentially be worth, it is useful to look at the spread of a given currency pair in relation to how much that pair is moving in a day. By looking at it in this light, traders can determine which spreads are worth paying and which are not. A lower spread does not necessarily make a pair a better candidate for day trading than a pair with a higher spread but a larger intraday range.
In the meantime, there is no need to worry about it. ”
To better understand the mechanism of currency spreads, let's first look at something more familiar. Online shopping. Amazon made it extremely popular, but in the early years people didn't trust online shopping. Few people were willing to disclose their personal details and billing information, but that has changed in recent years. The younger generation is much more familiar with secure registration and encrypted account access. Here's a detailed example to better explain the similarities.
Let's say you see sunglasses that you absolutely need. The price is better than ever and you decide to act quickly before the deal of the year is gone. You already have a verified account, so to place an order, just click the button and confirm. The seller receives the order and processes the request. Sounds familiar?
So how does the seller make a profit? You probably already know the answer ... price premium. The seller may pay $ 100 for the glasses, but will sell them to you for $ 150. This is a 50% mark-up. This is to be expected and no one has a problem with it. It is standard business practice around the world, and it is done in every major store. The same is with the broker, only the margin is called the "spread".
Take a look at these trading terms:
Currency pair: EURUSD
Buy rate: 1.1400
Sell rate: 1.1300
Forex spread: 0.0100 (difference between buying and selling)
Let's say you want to “buy” EURUSD. You are effectively agreeing to a contract that says that you will buy euros at the current buying rate and sell euros at the future selling rate. Trading conditions change after a few days.