Basic Ideas about Spreads



There are two prices for each exchange pair in margin forex trading, a “bid” or sell price and an “ask” or buy price. The bid price is the price at which traders can sell to the operating firm, while the ask price is the price at which traders can buy from the operating firm.

For instance, when you see that the rate quote of EUR/USD is 1.2882/1.2885, the bid is 1.2882 while the ask is 1.2885. That means traders looking to sell must do so at 1.2882, and those looking to buy must do so at 1.2885.

The dissimilarity between the bid and ask price is the spread, which creates the price of the trade. Actually, stocks, futures, currencies, indices, commodities and other traded instruments have spread.

Let’s say a trader buys at 1.2884 and then sells it immediately, there is a 3-point loss acquired. The trader needs to wait for the market to move 3 points in favor of his position in order to manage. If the market moves 4 points in his favor, then that means he starts to gain profit.

Most online trading companies like to promote margin forex trading as a practically cost free instrument, commission free, no service charge, no hidden cost and more. Traders need to know that the spread signifies the main source of revenue for the market maker.

It may appear that the spread is a very small expense but as soon as you add up the price of all the trades, you will find it can eat away quite a percentage of the funds in your account or your profit.It would be better to look into the spread first before you decide to trade forex .

Know your expense: the spread

The cost to a trader is called Spread. This is an income source of a specific firm that performs the trade.

The spread can differ a lot depending on the operating firm and parties involved in the foreign exchange market.

The bank can widen the spread to 30 to 40 pips when dealing with individual customers, while inter-bank foreign exchange can have spreads as tight as 1-2 pips ("price interest point").

The spreads of online forex trading were getting tighter in the past few years due to strong market competition. The spread is basically the same for major online foreign exchange businesses.

The table presents the usual spread of four major currencies of online foreign exchange trading at this time.

 

Currency pairs

Spread

USD/CHF

5 pips

GBP/USD

5 pips

EUR/USD

2-3 pips

USD/JPY

3-4 pips

 

Anything that is far below than the usual spread is uncertain. If the firm cannot make enough from the spread, there may be other hidden costs in the business deal, as the spread is the main source of income of a forex trading company.

Moreover, many market makers regularly extend the spread when market situations become more unpredictable. Hence, the cost of trading increases.

For example, if a financial number comes out that is off expectations, in that way producing a flood of buyers or sellers, the market maker may frequently widen the spread to reinstate the balance between buyers and sellers.

Accordingly, traders must make inquiries about the implementation practices of their clearance company. Companies with poor execution of orders and a tendency to widen spreads will eventually result in higher trading price for the end user.

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