What does spread mean in Forex Exchange Market
Let’s go directly to the trading terminal and see in practice what a spread is and how to take it into account when trading. Let’s say we have euro-dollar traffic. Currency pair — Eur/Usd. And we see the current price on the chart: 1.3293. If we click “open a new order”, then we will see that we have 2 prices — the price at which we can sell (this price is called Bid), and the price at which we can buy (this price is called Ask).
Why 2 prices, because there is only one price on the chart? Comparison with a currency exchanger helps very well here. Everyone has at least once used the services of a currency exchange office, exchange euros for dollars, euros for pounds, or some other currency. The bank always gives 2 prices. The price at which he can buy currency from you, and the price at which he can sell currency to you.
The price at which a bank can buy currency from you is usually slightly lower than the official rate of the Central Bank. And the price at which the bank can sell you currency is slightly higher than the official rate of the Central Bank. Why? Because the bank makes money on this difference. Each time selling you a currency a little more expensive and buying it from you a little cheaper than the official rate, the bank makes money for itself.
Broker’s earnings
The broker, every time you open or close a deal, earns on the spread from a fraction of a pip to several pips. When you buy, the broker makes money at the time of the trade, because you buy at a slightly higher price than the market. When you sell, the broker makes money at the close of the trade.
Please note that as soon as you open a buy trade, it is already in a small loss. This is because we bought at a slightly higher price than the market price. Similarly, with sales, but there the spread is taken at the moment of closing the deal.
What is the spread of Forex brokers?
Fixed with the possibility of further expansion. In this case, one of the fixed spreads can be maintained for a long time, however, at the discretion of the dealer, it can be changed depending on the current market situation on Forex.
Floating, which can be equal to 1 p.p. during a calm period in the market and can rise to 40 or 50 p.p. during sharp price spikes. This type is close to the trading conditions that are created by the markets on the interbank market. This type of spread is not suitable for all clients, as it can significantly complicate further testing. Often, floating spreads can only be successfully used by brokers and ECN banks.
For clients, most likely, it will be more profitable to have a small size of the forex spread, which is close to zero. Many banks usually operate with small spreads during periods of increased liquidity of any currency. Also, very often, for security reasons, the spread indicator can be increased in unstable situations in the market after several important political events and in anticipation of the release of particularly important financial data, which can always be monitored thanks to the economic calendar, which is usually provided by most brokers.
Dealing center client status
By setting low spreads for novice traders, the broker encourages them to trade. Now the practice of rebate is widespread — the return of a part of the spread or commission. It looks like a banal discount on any transaction, regardless of whether you came out with a profit or a loss.
Refunds are made through the services that brokers install. Not only traders but also investors are obliged to monitor the status of the spread. Especially if they are investing in assets that have indicators of potential delays. It should become a habit. Then you will be in control of your deposit and profits. Therefore, it is important to get good training in trading to understand how it works.
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