Forex Foreign Exchange Spreads
By Paul Bryan
Forex trading is one of the most popular and fastest growing financial trading opportunities. Exchange rates for currencies in the market are quoted as 'bid/ask' rates. The difference between the purchase (ask) and the sale (bid) rates is called the 'spread'. spread is one of the most important single parameter to make the difference between a successful and losing trading.
Forex spread is expressed in percentage in point (pip) which is the smallest measure of price move. For example, if the currency pair EUR/USD is trading at 1.3000 and then changes to 1.3020, the pair is said to move by 20 pips. A pip in most currencies is 1/10,000 of an exchange rate, but in USD/JPY, it is 1/100.
The bid/offer spread is the difference between the buying (bid) and selling (offer) price. The ask price is the immediate execution prices for quick buyers or traders and bid price is for quick sellers.
In market brokers generally do not charge any commission from you. But they get their money by charging you a spread. As the spread is the difference between the bid price and the ask price for any currency being traded, the broker adds this spread onto the price of the trade and keep it as their fee for service.
Therefore, for you, lower the pips and spreads, higher the profits. If the spread is big, you have to pay more when you buy and get less when you sell. spread is charged only on one side of the transaction, usually on the "buy" side of the trades. So, as a trader your aim should be to buy low and sale high.
If the quote between EUR/USD
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is said to be 1.2222/5, the spread equals 3 pips (5-2). Although it seems to be small, spread difference of one pip can make significant difference in your profit. You may find the difference to be as high as 25% on your trading costs.
Therefore, we advise you to choose a low spread broker. Most brokers offer different spreads for different currencies. For the most popular currency pairs like the EUR/USD or GBP/USD, you get the lowest spreads, while less popular currencies are traded with higher spreads.
The trade can also vary with the type of your account and volume of trades. But there are brokers who offer same spread to all accounts and any trade volume. You can even opt for fixed foreign exchange spread, but they are generally higher than floating spreads.
It should always be remembered that spread is the difference between bid prices and ask prices as determined by the free market and therefore can never be guaranteed. Spreads are generally tighter when there is good market liquidity but it widens as liquidity goes down. Find a broker, who is honest and transparent with the operations. Make sure there is no hidden spread and the execution is fast and accurate.
By: Paul Bryan
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