Forex experts explain what Spread is in Forex.
A spread in Forex, simply defined, is the price difference between where a trader may BUY or SELL an instrument. A market maker determines these prices based on the prices he gets 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. Which, is 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 known as “crossing the spread” and it is the COST of trading. It is the broker’s commission or brokerage fee.
Since the spread is different amongst brokers, it’s worthwhile to a little online research before you open an account with a broker. If you’ve been with the same broker for a while you may want to research compare spreads with other brokers. You may find relevant information on brokers here.
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. This in effect means 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. Traders are reluctant to be the best price. This causes a widening of the spread to avoid overpaying or selling too cheaply. Generally, the spread will widen when there is a great uncertainty as to Market direction.
Variable and Fixed Spread in Forex
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 that remains unchanged regardless of the circumstances, these instruments usually trade with a commission.
Understanding the general forex trade structure shows how the Forex Spread affects your trading. Brokers are the middlemen that conduct the trades. For processing the trades Forex brokers charge for their services. The charge or the difference between the bidding price and the asking price for a trade is called the spread.
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