Before setting the goal of reaching success on the path of financial investment, a trader must understand the basic thing: what is Spread. For long-time traders, this term is certainly no longer unfamiliar. However, if you are a new trader, learning and getting used to Spread is also quite new and difficult. In today’s article, traders should join Learn Forex Trading to learn about Spread fees, how to calculate Spreads, and many other related content below.
What is spread in financial markets?
So what is the definition of what is Spread? In English, Spread means to stretch out, stretch out, expose, prolong, or spread. However, in the Forex and stock markets, Spread is a term used to refer to the difference between buying and selling prices. Or it can be understood as the difference between the supply price (Ask) and the demand price (Bid) of a certain type of financial asset.
Especially in the online stock exchange, the selling price will always be higher than the buying price. Therefore, if a trader opens a position and then closes it immediately, he will definitely suffer a loss. And that loss will be exactly equal to the Spread difference. Therefore, when opening a trading order, traders will have to wait until the market moves in the desired trend. At the same time, the amount must be equivalent to the Spread or greater to create a profit.
See more: Successful what is forex exchange trading?
What is the formula for calculating Spread?
Calculating Spread in Forex is extremely simple. Its essence is the difference between Ask and Bid prices. Therefore, traders only need to subtract the Bid price from the Ask price to calculate the Spread. The specific Spread calculation formula will be as follows:
| Spread = Ask Price (Supply Price) – Bid Price (Demand Price) |
In there:
- Ask price: is the supply price and asking price
- Bid price: is the demand price and bid price
The unit used to calculate Spread is pips. This is the smallest unit used to measure price fluctuations of currency pairs. Normally, 1 pip will be equal to 0.0001. For example: You are trading a EUR/USD currency pair at 1.3091/ 1.3093. Then we will calculate Spread = 1.3093 – 1.3091 = 0.0002 equivalent to 2 pips.
Note that: The pip unit is completely different from the lot unit. To better understand what is lot, traders can click on the link above to learn more.
The importance of spread fees in Forex
After learning about the concept of what is Spread, we will continue to explore the importance of Spread in Forex. Spread fees play an extremely important role in traders’ trading strategies. If traders trade using the Scalper (short-term) method, they participate in the market regularly during the day. Because when the Forex Spread difference is too high, profits will be seriously affected. At this time, traders will have to place trading orders frequently and will see the spread fees accumulate quite a lot. Therefore, if applying this trading style, traders need to place trading orders when the spread is optimal.
If traders trade with technical indicators, they should identify a key indicator. At the same time, combine the use of other indicators to confirm trading signals accurately. For traders who enter and exit orders frequently, the Spread indicator can be used as a final filter to ensure traders do not incur high spread fees.
Types of Forex Spreads today
Currently, forex exchanges offer traders two main types of Forex Spreads. Including Fixed spread (Fixed Spread) and Variable, what is Spread (Floating Spread)? The choice and application of fees will depend on the brokers and how they make money.
Floating Variable Spread Fees
The floating spread fee is the difference between the Ask and Bid prices that is always changing. Depending on conditions, the exchange rate difference of currency pairs will depend on general market fluctuations. The advantage of this type of Spread is that the fees are usually lower than fixed fees. Therefore, traders can enter and place orders at any time. In addition, using a floating spread will help quote prices more accurately to the market rate. However, it has a limitation that the exchange rate is very susceptible to fluctuations. That causes Spread to increase sharply, affecting traders’ profits.
Fixed what is Spread – Spread cố định
A fixed spread is a spread that does not change regardless of time or market conditions. When trading with fixed spreads, traders can optimize their profits. Thanks to that, calculating transaction costs is also simpler because the fees do not change. On the contrary, trading fees with fixed spreads are often significantly higher than with floating spreads. At that time, traders have to invest a higher amount of capital and suffer more losses.
Factors affecting what is Spread?
According to the information above, Spread will be directly affected by market conditions. Besides, it is also affected by many other factors. So what are the factors that can affect what is Spread?
- Liquidity: the trading volume of a currency pair can impact spread fees. If liquidity is high, the difference between buying and selling prices will be less and vice versa.
- Economic and political risks: When there is economic and political instability in some countries, high inflation will often occur. At the same time, maintaining ineffective monetary policy increases risks when buying the currencies of these countries. At that time, traders will look for higher selling prices to compensate for costs, causing the spread to widen.
- Asset trading volume: High volume will push the market to move in the opposite direction. Therefore, traders must adjust fees to compensate for risks.
- Currency fluctuations: If a country has an inconsistent monetary policy, it will lead to large fluctuations. That pushes the selling price up to compensate and causes the spread to widen.
See more: How to register ICMarkets broker account
What should investors pay attention to about Spreads in Forex?
In Forex, news always makes investors feel insecure because the results of events have not been revealed. Therefore, they will expand Forex Spread to compensate for upcoming risk fees. So, if you are holding a position and the Spread is widening then the position should be stopped. At the same time, limit the amount of leverage in the account or hold the trade until the Spread shrinks. That will help traders protect themselves from the risk of Margin calls.
summary
Through the information that Learn Forex Trading has shared, readers should be able to better understand the question of what is Spread. Besides, traders don’t forget to learn more about terms like what is volume, buy and sell… to improve your trading knowledge. Instead of having to go far, follow us to learn more effective ways to invest.
FAQs:
what is Spread, and why is it important in Forex?
Spread in Forex is the difference between the buying price and the selling price of a currency pair. It plays an important role because it directly affects trading costs and traders’ profits.
How do spreads affect trading profits?
Spread affects profits because traders must overcome Spread to make transactions. If the Spread is large, trading costs will increase, reducing potential profits.
How to minimize Spread and optimize trading?
You can compare brokers to choose the Forex exchange with the lowest Spread. At the same time, trade during times of high liquidity to minimize volatility and large spreads. In addition, you should pay attention to market fluctuations and economic news because they cause fluctuations and temporarily increase Spreads.
