Spread is very important for the investors. Traders usually open a trading account on a broker depositing their funds. The broker acts on behalf of the trader and obtains as a remuneration for each transaction, both in purchasing and sell, what we call spreads.
Related: How to Trade Forex for Beginners
Spread is one of those words that everyone learned with the advent of the economic crisis that began in 2009. The spread in this case is related to BTP BUND but this word can be declined in many ways in the financial sphere.
The definition we need to know when it comes to trading is that spread is the actual cost for those who open a Forex trading account.
It is the one that can be decisive in choosing the best forex broker because it represents the difference in the markets between BID and ASK.
If over the years the forex market has become one of the most popular investments it is thanks to its great liquidity and the leverage very advantageous.
However, in the foreign exchange market, we should not forget to consider the costs as there are no commissions but only the cost of buying currencies.
Since the first thing to do in the forex market is to open a trading account on an authorized broker, that will act on behalf of the trader, the broker will receive his remuneration both for the purchase and the sale of the currency pair.
The trading price for any pair of currencies is expressed by the combination of the symbols that make up the currency pair, as well as the purchase price and the selling price.
The spread may vary from broker to broker, but usually it is between 2 and 10 pips. The broker adds the spread within the trade price and keeps it on its own, covering management costs and the revenue. This cost is charged once per transaction, usually during the purchasing phase.
The BID / ASK currencies tables, published by the Broker’s Internet sites, have already included the spread. Each currency pair has a different spread and most popular couples such as EUR / USD have significantly lower costs.
Market conditions may also affect the spread of each broker as it is not considered as a “fixed cost”.
Visit the ‘Forex’ section to find out the list of top forex brokers and their reviews.
After learning about the spread theoretically, let’s see how it is in practice with an example.
The trader wants to open a sales position in EUR / USD at the price of 1,4005. Immediately, the broker executes the order most likely at 1,4003, making immediately 1 pip on the execution.
After that, the trader wants to close the purchase position and sell it at 1,4010, but then the broker will execute the order at 1,4011 to make another pip on the run.
The trader will pay a fee for each execution in order to operate on the forex market and gain profits from each transaction.
The spread is a cost for the trader and the more you trade the more you are affected by that cost.
It is important to choose the broker that best suits the needs and way of trading of each trader. Do not forget to choose only the brokers authorized CySEC and read the terms and conditions carefully before sign the agreement.