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Understanding Spread in the Forex Market
In the foreign exchange trading market, the spread is difference between the bid (sell) price and the ask (buy) price of a currency pair. There are always two prices given in a currency pair, the bid and the ask price. The bid price is the price at which you can sell the base currency, whereas the ask price is the price you would use to buy the base currency.
The base currency is shown on the left of the currency pair, and the variable, quote or counter currency, on the right. The pairing tells you how much of the variable currency equals one unit of the base currency. The buy price quoted will always be higher than the sell price quoted, with the underlying market price being somewhere in-between.
What is spread in forex?
Most forex currency pairs are traded without commission, but the spread is one cost that applies to any trade that you place. Rather than charging a commission, all leveraged trading providers will incorporate a spread into the cost of placing a trade, as they factor in a higher ask price relative to the bid price. The size of the spread can be influenced by different factors, such as which currency pair you are trading and how volatile it is, the size of your trade and which provider you are using.
Some of the major forex pairs include:
- EUR/USD: Euro and US dollar
- USD/JPY: US dollar and Japanese yen
- GBP/USD: British pound and US dollar
- USD/CHF: US dollar and Swiss franc
The Benefits of a Low Spread Broker
The most obvious benefit of using a low spread broker is the reduction in up-front costs. Since spread can be thought of as a form of commission charged by forex brokers, lower spreads translate to lower prices for you. In addition, low spread brokers offer a more direct form of trading, as a lower spread means that the prices being quoted are closer to the true market price of a currency pair.
A low spread broker tends to make it easier to calculate the potential profits and losses from each trade that you place, allowing you to pursue a more informed trading strategy. If you are a day trader that tends to make money from numerous incremental price movements in currency pairs, lower spreads are definitely something that should be prioritised.
Forex spread trading strategies
Due to the above points, forex traders can employ an event-driven strategy based on macroeconomic indicators, in order to trade the tightest forex spreads and profit from opportune moments. For example, by monitoring the latest trading news and economic announcements, traders can expect changes in the forex market and find suitable entry and exit points when opening a position. This is called event-driven trading.
Forex spread changes
While we can agree that low spreads are great, we do have to take note that not all spreads are fixed. In fact, most spreads are often fluctuating and if the forex spread widens dramatically, you run the risk of receiving a margin call, and worst case, being liquidated. A margin call notification occurs when your account value drops below 100% of your margin level, signalling you’re at risk of no longer covering the trading requirement. If you reach 50% below the margin level, all your positions may be liquidated.
It is therefore important to gauge how much forex leverage you’re trading with and the size of your position. Forex pairs are usually traded in larger amounts than shares, so it’s important to remain aware of your account balance.
Low spread forex broker
We offer competitive spreads on a range of currency pairs, including major pairs such as EUR/USD and GBP/USD, starting at just 0.7 pips, or a forex margin rate of 3.3%. We also offer low spreads trading pairings of approximately 0.1 pips. Vlado Brokers offers forex trading on our hosted MetaTrader 4 platform. Get started now by opening an account.
Summary
A forex spread is the difference between the bid price and the ask price of a currency pair and is usually measured in pips. Knowing what factors cause the spread to widen is crucial when trading forex. Major currency pairs are traded in high volumes and so have a smaller spread, whereas exotic pairs will have a wider spread.
Come trade with Vlado Brokers today.
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Website: www.vladobrokers.com
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Website: http://www.vladobrokers.com
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