Spread is one of the main conditions for trading and investing in Forex. You should know what Forex spread is if you want to trade in the foreign exchange market. Spread is a cost that the traders incur for every transaction. If the spread is high, it will result in increased cost for trading that will eventually reduce the profit. FXCC is a regulated broker that offers tight spreads to its clients.
What is spread in Forex?
Spread is the difference between the purchase price and the sale price of the asset. In the standard currency market, deals are made all the time, but the spreads are not constant in every position. To understand why this happens, it is worth understanding the difference between the prices of buying and selling a currency when evaluating trades, which also determines the liquidity of the market.
In the stock market and Forex, spread is the difference between the buy and sell price. The spread in Forex is the difference between the ask price and the bid price.
What is a bid, ask, and its relation to the spread?
There are two types of prices on the market:
- Bid - the amount that the buyer of the monetary asset plans to spend.
- Ask – the price that the seller of a monetary asset plans to accept.
And the spread is the difference between the previously mentioned ‘bid and ask’ that occurs during the transaction. A good example of a transparent market relationship is bazaar bidding when a low price is put forward and a second bidder adheres to a high rate requirement.
What is the Forex spread from the broker's side?
From the point of view of an online broker, Forex spread is one of the primary income sources, with commissions and swaps. After we have learned what a spread is in Forex, let's see how it is calculated.
How the spread is calculated in Forex?
- The difference between the buying price and the selling price is measured in points or pips.
- In Forex, a pip is the fourth digit after the decimal point in the exchange rate. Consider our example of the euro exchange rate 1.1234 / 1.1235. The difference between supply and demand is 0.0001.
- That is, the spread is one pip.
In the stock market, a spread is the difference between the buy and sell price of a security. The size of the spread varies with each broker and by the volatility and volumes associated with a particular instrument. The most traded currency pair is the EUR/USD and usually, the lowest spread is on EUR/USD. The spread can be fixed or floating and is proportional to the volume placed in the market.
Every online broker publishes typical spreads on the Contract Specifications page. At FXCC, the spreads can be seen on ‘average effective spread’ page. This is a unique tool that shows the history of spread. Traders can see the spread spikes and the time of spike in a single glimpse.
Example - how to calculate the spread
- The size of the spread paid in euros depends on the size of the contract you are trading and the value of a pip per contract.
- If we are considering how to calculate the spread in Forex, for example, the value of a pip per contract is ten units of the second currency. In dollar terms, the value is $ 10.
- Pip values and contract sizes vary from broker to broker - be sure to compare the same parameters when comparing two spreads with two different trading brokers.
At FXCC, you can use a demo account to see real-time spreads on the platform or calculate spreads using a trading calculator.
Factors affecting the size of the spread on Forex
What factors affect trading spreads?
- Liquidity of the main financial instrument
- Market conditions
- Trading volume on a financial instrument
The spread of CFDs and Forex depends on the underlying asset. The more actively an asset is sold, the more liquid its market is, the more players are in this market, the less likely gaps will appear. The spreads are high in less liquid markets such as exotic currency pairs.
Depending on the broker's offer, you may see fixed or variable spreads. It should be noted that fixed spreads are often not guaranteed by brokers during periods of market volatility or macroeconomic announcements.
Spreads vary based on market conditions: during an important macro announcement, spreads widen, and most brokers do not guarantee spreads during announcements and periods of volatility. If you think about trading during a European Central Bank meeting or while the Fed has an important announcement, don't expect spreads to be the same as usual.
Forex account without a spread
Are you wondering if it is possible to trade Forex without a spread? ECN accounts are accounts that are executed without the participation of a dealer. You have only a small spread on this account, for example, 0.1 - 0.2 pips in EUR / USD.
Some brokers charge a fixed fee for each contract concluded but FXCC only charges spread and no commission.
The best Forex spread, what is it?
The best spread in the Forex market is the interbank spread. The interbank forex spread is the foreign exchange market's real spread and the spread between the BID and ASK exchange rates. To access interbank spreads, you need an STP or ECN account.
How to find out the spread in MT4?
Open the MetaTrader 4 trading platform, go to the "Market Watch" section. You have access to two ways included by default in the MT4 trading platform:
- Right click on market watch area and then click on “spread”. The real-time spread will start appearing beside the bid and ask price.
- On the MT4 trading chart, right-click and select "Properties," then, in the window that opens, select the "General" tab, check the box next to "Show ASK line," and click "OK."
What is Forex spread - the meaning of the spread in trading?
Each trader has his degree of sensitivity to the cost of the spread. It depends on the trading strategy used. The smaller the timeframe and the larger the number of transactions, the more cautious you should be when it comes to spreading.
If you are a swing trader who wants to accumulate a large number of pips over weeks or even months, the spread's size has little effect on you compared to the size of the moves. But if you are a day trader or scalper, the size of the spread can be equal to the difference between your profit and loss.
If you regularly enter and exit the market, transaction costs can add up. If this is your trading strategy, you should place your orders when the spread is optimal.