What is a spread in forex?
What is a spread in forex? To learn about this important concept in forex, be with the fxcyrus!
In simple language, the difference between Bid and Ask price is called spread, the spread is not only for the forex market, let’s say you plan to sell, will the exchange buy from you? No! He buys a little cheaper to sell more expensive, this difference is called spread in the forex market.
In fact, the income of a brokerage is from the spread that is at the heart of buying and selling currency pairs. The broker earns money for the services he provides in this way instead of that which is separated for any cost.
How to calculate the spread in forex:
The smallest unit of price movement of a currency pair is called a pip, the spread is also calculated on a pip! A typical pip is 0.0001 (in most currency pairs), for example a 3 pip spread for the US EUR/USD would be 1.1055 / 1.1058. Pay attention to the pairs whose one side is in Japan, only 2 decimal places are placed. For example, if JPY/USD is equal to 110.02/110.04, that means 2 pip spread is calculated.
It is better to have a low spread, but if a broker offers services with a spread, you should pay attention to prove that that broker connects the account to the bank and your transactions are under the supervision of the broker himself, which means that you are at risk (price manipulation, etc.) ) The spread should float, wide and increase before and after the news and this is completely normal.
Types of spreads in forex / What are spreads in forex?
Floating variable spread:
Brokers who play a market-making role use a fixed spread model, “with a trading desk” model, in contrast to brokerages that offer a floating spread, they use a “no trading desk” model. We recommend that you never look for a fixed spread, because in the end the account You are a loser.
Fixed spread in forex:
Fixed spread means that the market is important in the turbulence of the news or the spread does not change at the peak of calmness, the broker who offers a fixed spread does not connect your account to the main bank, in fact, the brokerage itself acts as the counterparty in customer transactions. A broker in this situation (having a trading desk) can completely control the prices they show to their customers! Never look for this type of service if you intend to pursue a trading career.
Advantages and disadvantages of fixed spreads:
Lower initial deposit in accounts with fixed spread and simple calculation of transaction costs, the only advantages of fixed spread are its numerous disadvantages, including 1- Back-to-back ricocheting (cancelling the previous order and presenting a new price) because the only source of pricing is only It is the broker where the account is active! Receiving a requote message in Metatrader or trading software means that the price will change during the news, whether you want to accept the new price or not! Usually, the new price does not have favorable conditions for trading.
2- Another problem with fixed spread is slippage, when prices move quickly and urgently, the broker cannot provide prices accurately and quickly. position!
It is clear that the floating spread means that it is constantly changing, in fact, the BID and ASK of currency pairs are changing! The floating spread is offered by brokers without a trading desk (prices are in the real sense without the involvement of a broker, and the broker is only a transmitter, and the spread naturally increases and decreases based on supply and demand and market fluctuations and emotions)
Another feature of these brokers is widening (increasing the spread) during holidays and midnight, when liquidity decreases. At the time of important economic news, spreads may increase several times!
Advantages and disadvantages of floating spreads:
Among the advantages of the floating spread, we can mention the removal of slippages (cancelling the previous order and offering a new price), not receiving a slippage does not mean removing the slippage. The forex market needs a floating spread for more transparency in pricing.
But among the disadvantages of the floating spread, we can point out that it is not ideal for scalper traders, for scalpers 1-2 pips is vital and the spread may increase suddenly and the scalper trader will suffer (scalpers prey on short-term and very low volatility)
For expensive trades, economic news may bring in a profitable floating spread or a loss.
According to your trading strategy, check which spread model is better for you…