What to understand about forex spread,
understanding the spread is surely an essential part of your Forex education. As you start to learn Forex, it is inevitable that you will find the term spread just like any other financial market you may have ever entered. In this article, we are going to discuss about Forex spread and every important thing to know about it. So, don’t miss it!
What Is a Forex Spread?
When it comes to spread, it is simply described as the price disparity between where traders may purchase or sell a fundamental asset. As you learn about spread, it is also important to mention bid and ask since on another words spread also refers to the difference between these two prices. For example, if the difference is 0.0004, this is the spread.
• An Example of Typical Forex Spread
For more precise instance, let’s take a look to this example. Remember that every trade in Forex involves currency pair. Let’s say you are going to trade GBP/USD. In this case, the GBP worth 1.1535 times USD. Since you think it will rise, you purchase at the asking price. However, the asking price won’t be precisely 1.1535. It can be a little more like 1.1537.
On the other side, the seller won’t receive full 1.1535 either. In this case, they are going to receive a bit less like 1.533. The 1.537 which is the ask price and the 1.1533 which is the bid price in this case have a difference of 0.0004. This 0.0004 is called as spread. This spread is how much a specialist keeps for facilitating the trade.
• The Significance of Spread in Forex Trading
Considering the example above, the spread of 0.0004 GBP doesn’t seem to be much. However, the bigger the trade, even a little spread can quickly adds up. Keep in mind that currency trades in the Forex market tend to involve bigger amounts of money. If you are retail trader, you might trade for about 10,000 GBP only. Nevertheless, the average trade can be much larger.
In average, the trade can be around 1 million GBP. At this point, the spread of 0.0004 in the example can be 400 GBP, such a significant commission of course. That’s why it is always a good idea to consider the amount of spread applied by a broker once you are searching for the best one. It is better to work with reasonable spread rule.
How to Manage and Reduce the Spread
Fortunately, there are some ways that you can do to decrease the cost of spreads in the Forex market. First, consider to trade in the most favorable trading hours. It means you need to trade when a lot of buyers and sellers are active in the market. Since there are high number of sellers and buyers, competition increases and the market frequently reduce their spreads.
Next, you should avoid purchasing or selling thinly currencies. A number of market makers try to win for business when you trade favorable currencies like GBP/USD currency pair. If you want to trade a lightly traded currency pair, there can be a few market makers only that accept your trade and represent less competition. At this point, they tend to keep a larger spread.
Conclusion
In conclusion, spread is an important term to understand when you learn Forex trading for the first time. This is a price different between ask and bid price which is taken by market makers to facilitate the trade. Since it will influence how much you can make in
Forex trading, it is a good idea for you to find a broker with a competitive spread.