What is the Meaning of Spreads and Their Effects in Forex Trading?

What are spreads in forex trading? and how does it work?

Forex spreads are the difference between the price of the request (bid) and the price of the offer (bid) in a forex trading transaction. This spread is the size determined by the forex broker. And from this spead, a broker gets an income or commission from each trader transaction.

The simple picture is like this, for example, we trade forex with a BUY position, when the price moves at a price of 1.5000, but when we open our position it is not calculated from the price of 1.5000 but above that price, for example at 1.5001 or 1.5002 depending on the specified spread broker.

Likewise vice versa for example we take a SELL position when the price moves at 1.5000, then the Sell transaction will be calculated below that number, for example at the price of 1.4999. This difference is determined by the forex broker, and each forex broker is usually different.

Spread is the difference between the selling price (sell quotes) and the purchase price (quotes buy). Spread is a source of income for a broker. How to calculate the size of the spread is the Buy-price Sell. We see the picture below.

The picture above is a price movement in the EUR / USD currency pair. We see:

  • The price if we take a Buy trading position is 1.2339
  • The price if we take a Sell trading position is 1.2337

Why at the same time, Buy and Sell open positions are not the same? . Yes ... this is what the spread means. The broker adds several points / pips to the trading transaction, which is a commission so that the broker gets a profit.

From the picture above we can calculate the amount of spread that applies to the EUR / USD pair at the broker, namely:
Price of BUY - SELL Price: 1.2339 - 1.2337 = 2 pips.

Now you can understand the picture of what is spread in forex trading. The size of the spread is influenced by several factors, namely:
Pair / currency pair
The forex broker policy is fixed spread or floating spread
Keep in mind that spread is important for traders because the smaller the spread, the greater the profit we get. So it's best before choosing a trading broker, consider the spreads that apply to each broker.

There are two types of spreads, namely:

  • Fixed Spread
  • Floating Spread

1. Fit Spread

Fixed spread is the difference between the bid and ask price determined by each broker with a fixed value, and will not experience a significant change. But if there is a further development if the broker feels the need to increase the spread, it will be raised.

However, even though the spread value is fixed or certain, there is usually a rule on the broker that is included in the disclaimer, ie there will be a spread increase if there is a fundamental issue that is very strong in influencing market price movements which results in a very fast movement of a currency pair.

 Brokers who apply fixed spreads are very good if used for long term trading.

Although brokers apply fixed spreads, the spread value of each pair / currency pair is not the same.

Excess fixed spread:
Stable spread costs can make money management trading more consistent.

Shortage of fixed spreads:
the value of fixed spread will be greater than the floating spread when it occurs in markets that move slowly or sideways.

1. Floating Spreads

Floating spreads are between bid and ask prices that can change according to the volatility of price movements that occur.

For traders who have experienced floating spreads it feels more attractive. Rising volatility is actually a moment or awaited moment. This is because at any time can take advantage in a short time.

But there are times when the Floating spread will feel more detrimental, namely:

When there is a change in spread, for traders who have taken an open position from the beginning (Before the spread changes big), certainly not a problem because it does not have much effect, except when experiencing a loss, due to the spread of the spread value is very detrimental.

And for traders who when performing an open position coincides with the moment the spread condition enlarges, then the impact of this change will be felt. Due to the many traders who also open positions at the same time, sometimes the possibility of delay in open positions, which will certainly be very detrimental trader if the price execution occurs at a price level that is different from the expected. Possibly the spread that will be borne will be large and the expected profit target will be small due to the delay.

We recommend that you pay attention to the spread on the currency pair used before opening a trading position.

Forex broker with the lowest spread

Is there the lowest or smallest forex spread? yes, low spreads are spreads with a value of 0 (zero). There are several forex trading brokers that offer zero spread services, which are account types with zero spread values ​​with the aim that traders can save more money on each trading transaction.

But we must also know the rules that apply, because sometimes there are special policies that must be considered. Such as zero spreads found on ECN accounts, which usually require that we have to accept trading conditions that are quite different from the standard accounts on broker trading brokers.

After knowing this, there must be many who are looking for a trading broker where the spread is low or the smallest. Because the size of the spread value influences the income of traders. Yes ... the smaller the spread value, the greater the profit, and vice versa.

We can see whether or not a forex broker is of the minimum spread value offered and also the amount of the initial deposit required. Spread is a profit commission for the broker

No wonder many traders prefer brokers with the lowest spreads. The higher the competition between forex brokers, not a few who compete to reduce the spread value. Now many brokers who provide spread services starting from 1 pips, some even provide spread services 0 ( zero) so many comma, for example 0.2, 0.3, 0.4 etc. Which is definitely a broker that still benefits.

Spreads as low as 0 pips are very common in forex brokers who provide ECN account services, this is because they offer direct access to the market, so we can get results without mark-ups from brokers. For example, minimum spreads for pairs can generally be as low as 0.1 pips.

In brokers with price quotes with 5 digit numbers, the spread determination is generally in the numbers 0.2, 0.4, 0.8 has been applied. With this convenience indicates the cost of trading transactions that are cheaper because the broker only takes commission in tenth pips or pipete.

Example if the bid price is at broker 1.00006 and the ask price is 1.00008, it means that the spread applied is 0.2 pips instead of 2 pips.

Forex brokers who dare to provide spread fixed services are 0 pips, usually trading costs are replaced by commissions, which is the amount of this commission depends on the broker's policy. For example, there are brokers who mention dollar commissions and there are also those with fees per trade.

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