To better understand the forex spread and how it affects you, you must understand the general structure of any forex trade. One way of looking at the trade structure is that all trades are conducted through intermediaries who charge for their services. This charge—which is the trade's difference between the bidding and the asking price—is called the "spread.
The forex spread represents two prices: the buying bid price for a given currency pair, and the selling ask price. Traders pay a certain price to buy the currency and have to sell it for less if they want to sell back it right away. For a simple analogy, consider that when you purchase a brand-new car, you pay the market price for it. The minute you drive it off the lot, the car depreciates, and if you wanted to turn around and sell it right back to the dealer, you would have to take less money for it.
Depreciation accounts for the difference in the car example, while the dealer's profit accounts for the difference in a forex trade. The forex market differs from the New York Stock Exchange , where trading historically took place in a physical space. The forex market has always been virtual and functions more like the over-the-counter market for smaller stocks, where trades are facilitated by specialists called "market makers. The buyer may be in London, and the seller may be in Tokyo—an intermediary is needed to coordinate the transaction.
The specialist, one of several who facilitates a particular currency trade, may even be in a third city. His responsibilities are to assure an orderly flow of buy and sell orders for those currencies, which involves finding a seller for every buyer and vice versa. In practice, the specialist's work involves some degree of risk.
It can happen, for example, that they accept a bid or buy order at a given price, but before finding a seller, the currency's value increases. The specialist is still responsible for filling the accepted buy order and may have to accept a higher sell order than the buy order they have committed to filling.
In most cases, the change in value will be slight, and the market maker will still make a profit. As a result of accepting the risk and facilitating the trade, the market maker retains a part of every trade. The portion they keep is called the "spread. Every forex trade involves two currencies called a currency pair.
Suppose that, at a given time, the GBP is worth 1. The asking price for the currency pair won't exactly be 1. It will be a little more, perhaps 1. Meanwhile, the seller on the other side of the trade won't receive the full 1. They will get a little less, perhaps 1. The difference between the bid and ask prices—in this instance, 0. The spread may not seem like much, but.
The facilitator can assist in thousands of these trades per day. Using the example above, the spread of 0. Currency trades in forex typically involve larger amounts of money. The 0. You have two ways of minimizing the cost of these spreads:.
Trade only during the most favorable trading hours , when many buyers and sellers are in the market. With variable spreads, the difference between the bid and ask prices of currency pairs is constantly changing. Variable spreads are offered by non-dealing desk brokers. Non-dealing desk brokers get their pricing of currency pairs from multiple liquidity providers and pass on these prices to the trader without the intervention of a dealing desk.
This means they have no control over the spreads. And spreads will widen or tighten based on the supply and demand of currencies and the overall market volatility. Typically, spreads widen during economic data releases as well as other periods when the liquidity in the market decreases like during holidays and when the zombie apocalypse begins. Oh, and spreads may also widen when Trump randomly tweets about the U.
Variable spreads eliminate experiencing requotes. This is because the variation in the spread factors in changes in price due to market conditions. Trading forex with variable spreads also provides more transparent pricing, especially when you consider that having access to prices from multiple liquidity providers usually means better pricing due to competition. The widened spreads can quickly eat into any profits that the scalper makes.
Variable spreads are just as bad for news traders. Spread may widen so much that what looks like a profitable can turn into an unprofitable within a blink of an eye. The question of which is a better option between fixed and variable spreads depends on the need of the trader.
There are traders who may find fixed spreads better than using variable spread brokers. The reverse may also be true for other traders. Generally speaking, traders with smaller accounts and who trade less frequently will benefit from fixed spread pricing. And traders with larger accounts who trade frequently during peak market hours when spreads are the tightest will benefit from variable spreads.
Traders who want fast trade execution and need to avoid requotes will want to trade with variable spreads. Now that you know what a spread is, and the two different types of spreads, you need to know one more thing…. The pip cost is linear. This means that you will need to multiply the cost per pip by the number of lots you are trading.
If you increase your position size, your transaction cost, which is reflected in the spread, will rise as well.
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The forex spread indicator is typically displayed as a curve on a graph to show the direction of the spread as it relates to bid and ask price. This helps visualise the spread in the forex pair over time, with the most liquid pairs having tighter spreads and the more exotic pairs having wider spreads.
There will also be a lower spread for currency pairs traded in high volumes, such as the major pairs containing the USD. These pairs have higher liquidity but can still be at risk of widening spreads if there is economic volatility. If the forex spread widens dramatically, you run the risk of receiving a margin call, and worst case, being liquidated.
Seamlessly open and close trades, track your progress and set up alerts. Discover forex trading with our award-winning trading platform , Next Generation. We also offer forex trading on our hosted MetaTrader 4 platform. Get started now by opening an account. 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 so have a smaller spread, whereas exotic pairs will have a wider spread. See our guide on money and risk management when trading in the forex market. See why serious traders choose CMC. Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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Do you offer a demo account? How can I switch accounts? CFD login. Personal Institutional Group. Log in. Home Learn Learn forex trading Spread in forex trading. Spread in forex trading In forex trading , the spread is the difference between the bid sell price and the ask buy price of a currency pair.
See inside our platform. Start trading Includes free demo account. Quick link to content:. What is spread in forex? Forex trading pip spread. Fixed Spread Variable Spread Could face requotes No risk of requotes Predictable transaction costs Can get a tighter spread than fixed Smaller capital requirements Can reveal market liquidity More appropriate for novice traders More appropriate for experienced traders A volatile market won't effect the spread Spread can widen rapidly if there is high volatility Likely to be exposed to slippage Can be exposed to slippage.
Trade on over forex pairs with us. Start with a live account Start with a demo. How to calculate spread in forex The spread is calculated using the last large numbers of the buy and sell price, within a price quote. For example: The bid price is 1. If you subtract 1. Practise trading the forex market risk-free with a demo account , using virtual funds.
What determines the spread in forex? And here's how to convert this spread in points into dollars or euros. The picture above is a screenshot from the mobile application of my LiteFinance broker. There are two prices in the transaction window, the buying price and the selling price. As we have already found out, these are Bid and Ask prices. Now we need to convert the pip spread into money.
I use the account currency, US dollars, so we will need to convert the pips to dollars. In my example, I decided to enter a trade with a volume of 1 lot. For a volume of 1 lot, the formula for calculating spread will look like this: 1. In my case, it will be equal to 0. If you want to calculate the spread cost for a different trade volume, you need to change the number of currency units. For example, for 0. Of course, you can calculate the spread manually, but trading has advanced quite far and every self-respecting broker has long been providing the service of a trader's calculator, which will calculate the spread and other transaction parameters for you in real-time.
Going back to the spread concept, I want to stress that the buy spread and sell spread are a bit different. When you buy you pay the spread when you enter a trade and when you sell you pay the spread when you exit the trade. Well, now you know how to calculate spread. I will start with the MetaTrader 4 trading terminal. When you want to enter a trade in the Metatrader terminal, you need to set parameters for the future transaction in the trade window. In the same window, you see the selling price and the buying price.
If you compare these two prices in the above example, you will see that the difference between the values is just two pips, 1. It means that the spread at the time of entering a trade is less than a point, 0. This is a very narrow spread, which is, by the way, normal for this broker. This tab displays the buying and selling prices, and the spread value in a separate field.
In this example, the spread is even tighter, 1 pip. The price of the currency pair is 1. The difference of 1 pip is the difference between buying and selling prices. As we want to buy, someone should sell. The seller is in the foreign exchange, and its selling price is 1. At this price, the trade will be entered, although the last price in the chart will be 1. This is because we pay the price appointed by the seller.
After a while, the price rises and we decide to exit the trade. So, we are going to sell the asset we bought earlier. The buyer sets the price of 1. Thus, summing up all these prices, we see that the price covered the distance between 1. But we made a profit from the distance between 1. Two missing pips are the spread. As I said, the spread is the difference between the buy price and the sell price. The above chart shows that these prices are currently the same, and the spread is 0.
This is possible only on the ECN accounts. If you are lucky to enter a trade at such a moment you will enter a zero spread forex trade. But do not forget that you will have to pay a commission for the transaction execution. For major trading instruments, the spread is always expressed in pips.
To find out the cost of the spread in the currency of your transaction, you need to convert the pips into money. It is easy if you know the pip value. In the above chart, the spread is one pip. To calculate the cost of the spread we also need the trade volume.
As an example, I will use the standard trade volume of one lot. And since our spread is 1 pip, it will cost 1 USD. Thus, entering a trade with the contract size of one lot, we will pay the spread of 1 USD, which will be charged at the moment of opening the position. It means that at the moment of opening the trade, we will immediately lose 1 USD, the amount of the spread.
So, we should earn at least the amount of spread to break even. Fixed spreads are normally determined by a dealing company for micro- and mini-accounts that are served automatically. It is the spread whose size is changing, depending on the market situation. The variable spreads are close to the conditions of the real interbank market. However, a floating spread weakens the performance of some trading strategies and makes strategy testing much more difficult.
A fixed spread is determined by the broker. In most cases, a fixed spread is a favourable factor for a trader, but its value is usually higher than a raw market spread. There are rather few forex brokers offering a fixed spread. The floating spread has become so popular that it has almost completely replaced the fixed spread. There are hardly any advantages in trading with a fixed spread. That is why this type of spread can entirely disappear.
No slippage. The slippages are often talked about and most beginner traders are really afraid of a slippage. In fact, this is a market feature that can be avoided on fixed spread accounts. In other words, the broker will always execute your contract in full, which will avert price slippage. I suppose everyone has witnessed a situation when the spread for a trading instrument sharply widened due to an important news release in the economic calendar.
This is the biggest flaw of the floating spread. But the fixed spreads are not affected by anything, as a broker has set a fixed range for the spread. You always know the spread size. Traders often used automated systems, robots, and scripts, in the forex market. These systems are based on algorithms, and these algorithms are easy to build when you know the spread in advance.
You can always take it into account when setting up order triggering and in the final result. It's hard to find a broker. In the modern forex market, where the leading roles have taken over ECN accounts with NDD order execution technology, that is, without the participation of a broker, it is very difficult to find a broker providing accounts with fixed spreads. Fixed spreads can usually be applied to cent accounts, which are less and less popular.
The fixed spreads are usually rather big. If the broker provides fixed spreads, it must take into account the volatility, its own profit, and the profit of the exchange. To compare, the current floating spread for this currency pair is about 0. The choice is obvious. Requotes on the Instant Execution account types. There are several types of trading order execution modes. One of the most popular is the Instant Execution mode. If you apply the Instant Execution mode and the spread is fixed, you cannot avoid requotes.
For scalpers, this is even more dangerous than slippage, because a scalper can destroy the entire system due to one failed order. Floating spread is the most common type of spread nowadays. It is popular because it is profitable for all parties taking part in the transaction.
Brokers and dealers can regulate and adjust it fast to changing market conditions, which allows solving 2 problems at a time: provide clients with higher-quality services and earn at the moments when the spread increases. This spread fluctuates in a certain range based on changing market conditions. This type of spread is favourable to manual trading. The above chart displays variable spreads for major currency pairs.
As you see, a floating spread seldom exceeds even 1 pip and in most cases, it is from 0. The above screenshot displays the spread in the trading terminal window. At the time of the snapshot, the spread between the buy and sell prices is only 0. Trading with such a low spread is very beneficial for short-term trades, where the spread is one of the main cost items. Narrow spreads during most of trading session. As we know trading hours in forex are provided by four large exchanges. And since most of the time falls on the work of the European and American trading sessions, variable spreads at this time will be minimal and can widen only in moments of serious shocks, which do not happen so often.
No requotes. I wrote about requotes as a drawback of fixed spreads. Well, in trading with variable spreads everything is vice versa, your trade will be executed in any case. The only risk here is slippage. There could be zero spread. Sometimes, when the market situation is calm and still, nothing special or extraordinary happens, you can catch a moment when there is no spread at all.
I have come across such a situation in trading major currency pairs several times. The broker is entirely excluded from the trading process. Transactions are executed using the No Dealing Desk technology, which completely excludes the broker from the processes of determining spreads, quotes, and other things. Thus, traders can be sure that they deal with real market participants and have access to real exchanges. There could be slippages. This is perhaps the biggest flaw of the variable spread.
At times of increased volatility, your trade will be executed, but the opening price of the trade may differ from the one at which you planned it. This happens when the market price changes so quickly that it sometimes goes right through the orders set in the order book. Widening spreads in case of low liquidity. During periods when there is no trading activity in the market, for example, during the Asian trading session, spreads widen to a significant size. This also happens before the market trading closes for the weekend.
Sometimes the spreads widen so much that they become larger than the fixed ones. This circumstance matters for traders using robots and scripts. If your trading robot is supposed to enter a lot of trades in a short period, a floating spread could be a reason for a loss in a series of trades.
After describing the disadvantages and advantages of both types of spread, I decided to sum up the most important ones in the table below to determine which of them is the best. As you can see in the table, the floating spread has more key advantages. This is quite logical, since variable spreads are a necessary condition to make sure that you are trading in the exchange, and the counterparties are real market participants, not the broker itself.
When trading with a floating spread, you can always find a moment for your trade when you can pay less. The only cost for you will be the commission, which will almost always be lower than the fixed spreads. With popular and large brokers, floating or variable spreads are always very close to the raw market ones.
As for me, I have long ago chosen to trade with variable spreads. Moreover, my broker LiteFinance provides a spread as close to raw as possible and in recent years I have not taken it into account at all in my strategy, since it is very small.
If so, it needs to consider the interests of all participants in an exchange operation - a trade. The formula looks as following:. The bank provides you with access to exchange operations and charges you a fee. As for the broker, it is an intermediary in exchange operations that passes your order to the stock exchange and therefore charges a commission for its participation in the process too.
It became possible after ECN trading accounts were created. It provides raw spreads. Actually, trading with no spreads is practically impossible, but this type of account provides for much tighter spreads. As long as the access to such trades is delivered by a broker, its interest is considered as well.
These accounts appeared much earlier than ECN. It should be understood that there is no forex with zero spreads. The exchange always takes its commission. If the broker has a zero spread, then you only have to guess as to how it makes money When it comes to the value of variable spreads, there are several important factors that influence it at a given time. Liquidity of a trading instrument - the ability of goods to be sold or bought fast.
On the stock exchange, all the trading instruments are divided into groups based on a number of factors, and liquidity is one of them. Liquidity means popularity. The more popular a trading tool is the higher its liquidity. The more liquid a trading tool is, the tighter its spread is.
The less popular a tool is, the larger the spread is. This is the basic formula, but there may be some adjustments that change the dependence under certain circumstances. The volatility of a trading instrument - the number of price fluctuations per unit of time. The number of price fluctuations is measured in ticks. The more ticks per time unit, the higher volatility. Of course, an increase in volatility raises the price in points.
The higher volatility is, the larger the spread will be during volatility leaps, and vice versa. Again, these are basic characteristics and they may change. For example, volatility may increase at breakneck speed when fundamental news is published and spreads rise too, and then volatility drops shortly afterward and spreads drop as well.
When the spread soars, ad hoc orders may trigger, which may crush the whole trading system afterward. Trading hours - Spread values depend on the part of the day. When a trading instrument is being traded during its main trading session, the spread will be lower than when the main trading session is closed. We can see that at night, when, for example, the European trading session is closed and the major currency pairs are quoted during the Asian session. The value of spreads is also affected by clearing - the settlement process.
It happens at , broker time, and when the stock exchange closes for weekends and holidays. Spreads normally increase at those moments. This value is determined by brokers themselves based on their own understanding of the market situation. Different brokers provide different spreads. This is one of the reasons why ECN accounts were created. Less popular brokers set higher spreads while more popular brokers try cutting them as much as possible. It sounds quite promising, but these are just big words actually.
What an ordinary trader may claim is partial reimbursement. There exist a lot of spread rebate services. Traders may have a part of the spread paid back. There are several options. To become a participant in a rebate system, you need to register on the site of the service which cooperates with your broker or to trade with a broker which provides a similar interior system.
Every broker sets its own rules for a spread rebate. These rules are quite numerous and they are mainly aimed at counteracting fraudulent schemes. These rules practically exclude micro scalping as almost every broker sets a minimum amount of points between the closing and the opening prices.
By and large, this service will be convenient only to those traders who use a medium-term trading strategy which implies trades in a calendar month. They can be popular with scalpers but not all of their trades are subject to rebates due to strict limitations. Personally, I used those services at the very beginning of my trading career just for understanding what they are like.
I often see chats and forums where people look for and compare forex brokers with low spreads. Is there any correlation between the quality of services and spread values? Every client pays a commission per trade, for example, 1 USD. If there are 10, clients, the broker will earn a lump commission of 10, USD. And how many trades does a client make in a day?
Besides profits, big brokers have some expenses too. Remember the main thing: no broker can afford to free its clients from commissions. Otherwise, they will make losses and go bankrupt soon. Big and reliable brokers can afford to cut spreads to a reasonable extent. Customer acquisition activities and customer loyalty. If there are many clients, there are many trades. And if there are many trades, the broker will have its commission.