Understanding Forex Spread



Forex spread is just the difference between the price that you are buying and the price you are selling

When talking about forex trading you have to understand that forex is always priced in pairs between two different types of currencies. To trade forex, you have to buy one currency and sell another at the same time. If you want to exit the trade, you must buy/sell the opposite position. For example, if you think the price of the Euro is going to rise against the US Dollar.

In order for you to enter that trade, you will have to buy Euros and sell US Dollars. And if you want to leave the trade, you will have to sell Euros and buy back US Dollars. If the exchange rate for EU/USD has actually risen, it will mean that the Euros you recieve back will be more than when you bought, which is how you profit in forex trading.

A lot of forex brokers are claiming to have the tightest forex spread in the industry. But marketing can be deceiving. The topic of spreads in the forex market is very complicated and often not easy to understand.

However, nothing affects your trading profitability more. First of all in order to understand forex spread, you need to know what it is. Forex spread is the difference between the asking price (the price you buy at) and the bidding price (the price you sell at), and it is quoted in pips. If the quote between EUR/USD at a given moment is 1.2222/4, then the spread equals 2 pips. If the quote is 1.22225/40, then it is going to equal 1.5 pips.

Spread is the only way brokers make their money, since forex brokers don't charge commissions like their stock market counterparts. Wider spreads will result in a higher asking price and a lower bid price. The consequence to this is that you have to pay more when you buy and get less when you sell, which makes it more difficult to realize a profit

Brokers generally don’t earn the full spread, especially when they hedge client positions. The spread helps to compensate for the market maker for taking on risk from the time it starts a client trade to when the broker's net exposure is hedged (which could possibly be at a different price).


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