What is a Spread in Forex?
If you’re new to trading you may be wondering what is a Spread in Forex?
A spread is simply defined as the price difference between where a trader may BUY or SELL an instrument. These prices are determined by a market maker who in turn gets his prices from the greater market. Traders that are familiar with equities will call this the Bid: Ask spread or bid and offer
A traditional broker earns his commission or fee from the difference in the spread, the difference between the buyer’s price, and the seller’s price. To the trader, this is the COST of the trade. The wider the spread the more expensive it is for a trader to trade that instrument
Remember you BUY at the seller’s price and SELL at the buyer’s price. This is also referred to as “crossing the spread” and it is the COST of trading, or the broker’s commission or brokerage fee.
The forex spread has two prices: the buying (bid) price for a given instrument, and the selling (ask) price. Traders pay a price to buy the instrument and must sell it for less if they want to sell back it right away.
The spread increase or decreases in forex when the volatility increases or decreases. Inactive trading hours or in volatile times market makers compete with each other to be the “best price” or first price in the queue in effect jumping the queue to be the best price resulting in a narrowing the spread. The opposite is true in less volatile or out of active trading hours where traders are reluctant to be the best price so there is a widening of the spread to avoid overpaying or selling to cheaply. Generally, the spread will widen when there is a great uncertainty as to Market direction.
Variable and Fixed Spread
The bulk of instruments trade with a variable spread. In a variable spread, the difference between the buy and sell price of a currency pair fluctuates in a range, depending on the volatility of the market, or the time you are trading an instrument.
A fixed spread is a spread which remains unchanged regardless of the circumstances, these instruments usually are traded with a commission
To better understand the forex spread and how it affects you, you must understand the general structure of any forex trade. One way of looking at the trade structure is that all trades are conducted through middlemen (the brokers) who charge for their services. This charge, or the difference between the bidding price and the asking price for a trade, is called the spread.