Understanding Spread in Currency Trading

Your forex broker profit from your trade at the minimum by charging you forex spread, while other forex brokers charged commission and other fees on top of their spread giving them more earning and more expenses on your every trade.

There are 3 things that you should keep in mind about forex spread.

1. Forex Spread is primarily the difference on the buy price and the sell price quotation. Forex brokers regularly charge a variable forex spread but there are some forex brokers that charged a fix amount of spread.

To illustrate how to compute the spread compare the bid price and the ask price. Example a quote for the EUR/USD is Buy at 1.2570 and sell price of 1.2567, the difference is 3.0 pips or $3 per 10k lot, this is the spread.

It is good to have a broker that charges small and fix forex spread and do not choose forex brokers that have a high forex spread and other charges like commission.

2. Forex Spread is how your forex broker earns on your every trade.

Here is the example on how your broker earns from the spread you pay every time you trade, if you are buying EUR/USD using the above quote, you will buy it at the buy price of 1.2570 and can only sell it at the sell price of 1.2567 leaving you with a 3 pips loss, this will translate to a 3 pips profit for your forex broker, this assumes that the quote did not change when you open and close the trade the spread can move up or down while your trade is still open.

It is the same when you are shorting or short selling any currency pair. To illustrate further, let’s say you are short selling euro-usd, using the same quoted price above, you will sell it at the bid price of 1.2570 and assuming the quoted price did not change you can close your short position by buying the euro-usd at the ask price of 1.2567, giving you a loss of the same 3 pips.

3. Forex Spread will be credited to your account the time you close your position or your open trade, either by selling your long position or buying back your short position.

Account for the spread every time you are making a trade because you profit on the pips you earned on top of the spread you pay, this is easy if you are paying a fix spread but if your forex broker charged variable spread. It can drive the spread from 10 to 50 pips or more in just a matter of seconds. Remember that any increase in the spread is directly benefiting your broker’s profitability and directly impacting your profitability the opposite way.

Remember these three basic but vital things about forex spread and it can guide in choosing your trades to ensure you get the most of out of it, avoid paying very high forex spread by not trading during the wild and volatile movement of the market at certain news announcement and choosing to trade on calm market hours.