What is Spread in Forex? Types and differences

What is Spread in Forex? Types and differences

Spread is the difference between the buying price of a currency pair and its selling price (Bid and Ask).

The size of the spread determines the liquidity of the market. The higher it is, the lower the spread size. That is, when trading popular currency pairs, the spread will be small, and the more exotic the asset, the higher the spread.

For example on cryptocurrency the spread of forex brokers sky-high.

How does the spread affect trading?

The spread is charged immediately upon opening a deal, that is, the trader immediately incurs losses equal to the spread.

In order for an order to cross the breakeven point, the price must travel a distance in the direction of the trade that would exceed the spread. This is a kind of commission for opening a trade. For honest brokers, it is the only source of profit.

Spread types

Spread can be fixed or floating. Its value depends on the liquidity of the currency pair, the activity of trading and on the broker itself. The more the intermediary cares about its customers, the narrower the spread it offers.

The value of the spread is especially critical for traders working in the short term.

It also happens that some brokers make a fixed commission when opening a transaction, for example, 10$ for one position, and no matter what lot it is opened - everything is included, and the spread and everything else.

To some, this option may seem costly, since you have to pay 10 bucks for each transaction, but it may seem scary for beginners, on the contrary, it is more profitable for experienced traders.

It happens that during super high volatility there is an expansion of the spread and the trader may simply not have time to exit the transaction or open a position with a large loss by paying for a very large spread.

What type of spread is preferable?

With a fixed spread, you know for sure that it will not expand, for example, when important economic news is released, but it will not decrease either. You will pay exactly as much as specified in the contract specification every time you open a new order.

The downside is that fixed spreads are usually higher than floating spreads. Because floating points start from zero.

But again, it’s a very rare case when you meet a zero spread, usually this doesn’t happen, it’s more and more a “marketing ploy”, because the spread depends on volatility, and trading pairs go non-stop))

The only exceptions are binary options — where the spread is really zero.

Conclusion one: if you are a beginner in the market, then choose the main currency pairs with floating spreads and do not trade during the news (1 hour before the release of important news and 1 hour after the release).

Why choose a floating spread? If you take the main pairs and do not touch the exotic, then most often the spread for them does not exceed 3 points.

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