Every time you buy and sell a currency pair you pay the spread. You can think of it as a fee that your broker charges you to trade. A spread exists in virtually every freely traded market.
If a currency has a certain price, for example, GBP/USD = 1.5705, the broker will quote you a slightly higher price of 1.5706 if you’re looking to buy. Should you want to sell GBP/USD, they will purchase it for only 1.5704. The value of the spread is thus equal to the difference between the bid price and the ask price.
Below we have another example of a EUR/USD quote that reads 1.25387/1.25403. The spread would be 0.00016 or 1.6 pips.
What this means is that there’s a difference of 0.16 cents between what you pay to buy the same currency pair, and what you’d receive if you were selling it. In case you sell the currency and decide to buy back the currency you have just sold while the rate did not move a point, then the difference you will lose will be the spread that is 1.6 pips in the given example.
Even though these values may seem insignificant, even the smallest point change can result in thousands of dollars being made or lost due to leverage.
By definition, there are two types of spreads:
- 1. Fixed Spread – a constant price difference between the Ask price and the Bid price, which is artificially maintained by the broker. Commission spreads in Forex are typically in the 2-5 pips range.
- Floating Spread – a real spread of the interbank Forex market with an accuracy of 5 decimal places. How big the spread will be is decided by things such as supply/demand and the liquidity of the asset.
Things to keep in mind:
- Spread is a cost of trading;
- Sellers are ASKing for a high price. Buyers are BIDding at a lower price. The difference between the ASK and the BID price is the spread.
- Whether you trade automatically or manually, you should always take spread into account.
- Your progress 26% 26%