Spread Forex is a familiar term to those involved in foreign exchange trading. However, not everyone clearly understands the meaning, calculation and application of spread in practice. This article, Learn Forex Trading will introduce traders to issues related to forex spreads, as well as ways to minimize costs and optimize profits from spreads.
What is a Forex spread that can have a strong impact on trading?
As a trader in the market, you need to understand the following basic concepts about spreads when trading forex.
Explain the concept of Spread in Forex
The concept of spread in Forex is the difference between the buying price (bid) and selling price (ask) of a currency pair. The buy price is the price the broker is willing to buy back from you. On the contrary, the selling price is the price at which the broker is willing to sell it to you. Spread represents the difference between these two prices. This is also the main source of income for brokers.
Forex Spread Fluctuations
Spread Forex is not a fixed value. This fee may fluctuate over time and by currency pair. There are two main types of forex spreads: floating spread and fixed spread.
Spread in Forex reaches a high level (high spread)
A high Spread Forex means that the difference between the buy and sell price of a currency pair is very large. There can be many reasons for this. Usually, it’s because the market is highly volatile or because the currency pair has low liquidity. When the spread is high, you will have to pay more for each trade, and it will be harder to make a profit.
Low spread forex
A low Spread Forex means that the difference between the buy and sell price of a currency pair is very small. There can be many reasons for this. Usually, it’s because the market has low volatility or because the currency pair has high liquidity. When spreads are low, you will pay less for each trade, and it will be easier to make a profit.
The relationship between Spread Forex and Bid and Ask
Spread Forex is the difference between the buying price (bid) and selling price (ask) of a currency pair, but how do you know what the buying price and selling price are? To answer this question, you need to understand the concept of bids and ask questions in forex.
A bid is the price at which the broker is willing to buy back a currency pair from you, and ask is the price at which the broker is willing to sell you a currency pair. Bid and ask always have a difference, and this difference is the spread. Bid and ask are expressed as two numbers after the decimal point of the currency pair price. The first number is bid, and the second number is asked.
Why is Spread important in Forex trading?
Spread Forex is important in forex trading because it affects your costs and profits. When you open a trade, you will have to pay the broker for the spread. This means you will start trading with a loss equal to Spread Forex. To make a profit, you must wait for the currency pair price to move enough to overcome the spread. Therefore, the lower the spread, the easier it is for you to profit, and vice versa.
In addition, spread also affects your trading strategy. If you are a short-term trader or scalper, you will often open and close many small trades in a day. This means you will have to pay more spreads than a long-term trader or swing trader, who only opens and closes a few large trades a week. Therefore, you need to choose currency pairs with low spreads and brokers with reasonable spread policies.
See more: You will lose if you do not know about Trading
Types of Spread finance
Can be classified according to many different criteria. One of the most common classifications is spread volatility. In this way, there are two main types of spreads: floating spread and fixed spread.
Floating Spread Forex
Is a type of spread that can change over time and by currency pair. Floating forex spreads directly reflect market supply and demand. It can, therefore, fluctuate widely during times of high volatility. These include when there is important news when there is a transfer session, or when there is intervention from the central bank.
The benefit of floating Spread Forex is that you can take advantage of low spread times to minimize costs and increase profits. However, the disadvantage of floating spreads is that it is difficult to predict the Spread Forex before opening a trade. At the same time, you may have to endure periods of high spreads. Thereby making it difficult to place orders and achieve profit goals.
Fixed Forex spreads
A fixed forex spread is a spread that does not change over time or per currency pair. Fixed spreads are offered by the broker based on the agreement with the liquidity provider. Therefore, it does not reflect the supply and demand of the market. Fixed spreads are often applied to highly liquid currency pairs. Some popular currency pairs such as EUR/USD, GBP/USD, USD/JPY,…
The benefit of fixed Spread Forex is that you can know the spread before opening a trade. Therefore it is possible to plan and calculate trading strategies accurately. However, the disadvantage of fixed forex spreads is that you cannot take advantage of times when the spread is lower than the fixed level. At the same time, additional fees may apply. Includes swap fees, trading fees, or insurance fees, to compensate the broker.
How do you calculate Spread fees accurately?
Spread Forex is one of the most important costs in forex trading. Therefore, trader need to know how to calculate spreads correctly.
Formula to help calculate Spread in Forex
The formula to calculate spread in forex is quite simple: just subtract the ask price from the bid price of a currency pair. The result is the spread of that currency pair, usually calculated in pips.
For example, Suppose you want to trade the EUR/USD currency pair, and your broker offers a buy price of 1.1800 and an ask price of 1.1802. To calculate the Spread Forex of this currency pair, simply subtract 1.1802 from 1.1800, and the result is 0.0002 USD or 2 pips.
What is the spread fee unit?
The spread unit is the currency you use to calculate the spread cost of a trade. The spread can be your base currency, quote currency, or account currency.
- The base currency is the leading currency in a currency pair.
- The quote currency is the second currency in a currency pair.
- The account currency is the currency you use to open your trading account with the broker.
How does Forex spread affect trading?
Spread Forex don’t just affect your costs and profits. In addition, it also affects your trading style.
Learn about Spread Forex Expansion Phenomenon
The forex spread phenomenon is a phenomenon in which the spread of a currency pair increases suddenly in a short period of time. This phenomenon often occurs when the market has strong fluctuations or when there is a shortage of liquidity. When spread widening occurs, you will have to pay more costs per transaction, and it will also be harder to make a profit.
Spreads in forex can create differences in value
Slippage is a phenomenon where your transaction execution price is different from your desired price. Value differences can occur for many reasons. One of the main reasons is Spread Forex. When forex spreads are high, it will be difficult for you to place an order at the price you desire. At the same time, you may have to accept a lower price when selling or a higher price when buying. This means you will incur a larger loss or a smaller profit than expected.
Factors that can affect Spread in Forex trading
Spread Forex is not a fixed value but can change according to many factors. Some important factors that can affect spreads are as follows.
Liquidity of assets in Forex trading
Asset liquidity is the ability of an asset to be bought and sold quickly without affecting its price. In forex trading, the liquidity of an asset is expressed through the trading volume of the currency pair. The more people trading a currency pair, the more supply and demand there is. Therefore, it is easier to buy and sell that currency pair. When asset liquidity is high, Spread Forex will be low, and vice versa.
Spreads may change depending on the time of Forex trading
Forex trading time also affects the volatility of forex spreads. The forex market operates 24 hours a day, but not always with the same level of excitement. There are times when more people participate in trading, and there are times when fewer people participate in trading. When the market has many trading participants, liquidity will be high, and forex spreads will be low. On the contrary, when the market has few people participating in transactions. Liquidity will be low, and spreads will be high.
Interest rate/commission margin of Forex trading platform
Interest margin (markup) or commission (commission). These are the fees that the broker charges you when you trade forex. Interest margin is the addition of a certain amount to the Spread Forex of a currency pair. The commission is a certain amount based on your trading volume. Both of these fees affect your costs and profits. At the same time, it also affects the spread.
Volatility of Forex trading instruments by time unit
The volatility of a forex trading instrument is the change in the price of a currency pair over time. The volatility of forex trading instruments can be measured in many ways. One of the most popular ways is by using the ATR (Average True Range) indicator.
ATR is a technical indicator, calculated by taking the average of the distances between the highest and lowest points of the currency pair’s price over a certain period of time. The higher the ATR, the greater the volatility of the forex trading instrument, and vice versa.
Volatility in forex trading instruments affects Spread Forex. Because it affects the supply and demand of the market, when the volatility of a forex trading instrument is high, many people will want to trade that currency pair to take advantage of the profit opportunities.
How to reduce Forex Spread?
Spread is one of the most important costs in forex trading. Therefore, you need to find ways to effectively reduce Spread Forex.
Choose currency pairs with low Forex spreads
A simple and obvious way to reduce forex spreads is to choose currency pairs with low spreads to trade. Currency pairs with low forex spreads are often highly liquid currency pairs. These can be mentioned as major pairs or currency pairs related to the USD. You should avoid currency pairs with high forex spreads, such as exotic pairs, or currency pairs that involve weak currencies, such as TRY, ZAR, and MXN.
Choose a Forex trading broker that offers low spreads
Another way to reduce Spread Forex is to choose a forex trading broker that offers spreads that are not high or at least reasonable. A forex trading broker is a middleman between you and the market. Therefore, it is possible to set spread levels for currency pairs. There are forex trading brokers that offer low spreads; there are trading brokers that offer high spreads. At the same time, there are forex trading brokers that offer spreads that change from time to time. You should carefully learn about the broker’s spread policy before deciding to trade with them.
Trading platforms with low Forex Spreads today
If you are looking for a forex trading broker that offers low-spread forex. Traders can refer to the following popular exchanges:
- Exness: This is one of the most reputable and popular forex trading platforms today. Exness offers many different types of trading accounts with low and competitive spreads.
- XM: This is a reputable forex trading platform with many years of experience in this field. XM offers a variety of trading accounts to suit client needs and experience levels.
- FBS: Forex trading platform is known and trusted by many people. FBS offers many diverse and flexible trading account types with low and attractive spreads.
Limit Forex trading at high spread time frames
Another way to reduce spreads is to limit forex trading in time frames with high Spread Forex. As mentioned above, spreads can change depending on the time of forex trading. At the same time, there are times when the spread is higher than at other times. You should learn about the spread charts of the currency pairs you are interested in. At the same time, avoid trading in time frames with high spreads. These include when there is important news when there is a transition between trading sessions, or when there is intervention from the central bank.
See more: Instructions for registering an Exness account
Is it possible to make money from Spread Forex?
Is a cost that you have to pay when trading forex. However, you may not know that you can also make money from spreads. There is a forex trading technique called spread trading. Allows traders to take advantage of the difference between the spreads of two different currency pairs. You can trade spreads by buying a currency pair with a low spread and selling a currency pair with a high spread or vice versa. You will make a profit when the spread of those two currency pairs changes in your favor.
Thus, the article on Learn Forex Trading introduced about Spread Forex . This is one of the most important costs in forex trading. Traders need to know how to calculate spreads and how to effectively reduce spreads. Hopefully, this article has helped you gain more knowledge and skills about forex trading.
FAQs:
What is forex spread?
Spread Forex is the difference between the buying price and selling price of a currency pair.
What is the spread fee calculation?
The way to calculate the spread is to multiply the forex spread (in pips) by the trade size (in lots), and then convert to your base, quote, or account currency.
What is the way to reduce forex spread?
The way to reduce spreads is to choose currency pairs with low spreads. Therefore, choose a forex trading broker that offers low spreads and limits forex trading to high-spread time frames.
