💰 What is Spread?
Spread is the difference between the bid (sell) price and ask (buy) price of a currency pair. It's the cost of trading and represents the broker's profit. Understanding spreads is essential for cost-effective trading and risk management.
Introduction to Spreads
The spread is the primary cost of forex trading. It's measured in pips and varies by broker, currency pair, and market conditions.
Why Spreads Matter
- Trading Cost: Direct impact on profits
- Entry Cost: Must overcome spread to profit
- Broker Comparison: Key factor in choosing a broker
- Strategy Impact: Affects scalping and short-term trading
Understanding Spreads
Bid and Ask Prices
- Bid Price: Price you can sell at (lower)
- Ask Price: Price you can buy at (higher)
- Spread: Ask - Bid = Spread
Example
EUR/USD:
- Bid: 1.1000
- Ask: 1.1002
- Spread: 2 pips
Types of Spreads
Fixed Spreads
Definition: Spread remains constant.
Pros:
- Predictable costs
- Good for beginners
- Budget planning
Cons:
- Usually wider
- Less competitive
Variable Spreads
Definition: Spread changes with market conditions.
Pros:
- Tighter during normal conditions
- More competitive
- Better for active traders
Cons:
- Can widen during news
- Less predictable
Factors Affecting Spreads
1. Market Liquidity
- High Liquidity: Tight spreads (major pairs)
- Low Liquidity: Wide spreads (exotic pairs)
2. Market Volatility
- Normal Conditions: Tight spreads
- High Volatility: Wide spreads (news events)
3. Trading Session
- Active Sessions: Tight spreads (London/NY overlap)
- Quiet Sessions: Wider spreads (Asian session)
4. Broker Type
- ECN Brokers: Variable, tight spreads
- Market Makers: Fixed or wider spreads
Spread Impact on Trading
Cost Calculation
Example:
- Trade: 1 lot EUR/USD
- Spread: 2 pips
- Cost: 2 pips × $10 = $20 per round trip
Break-Even Point
You must overcome spread to profit:
- Spread: 2 pips
- Break-even: Price must move 2 pips in your favor
- Profit: Only after break-even
Best Practices
1. Choose Low Spread Brokers
Compare brokers:
- Check average spreads
- Look for low spread brokers
- Consider ECN accounts
2. Trade During Active Hours
Best Times:
- London session (07:00-16:00 GMT)
- NY session (13:00-22:00 GMT)
- Overlap period (13:00-17:00 GMT)
3. Avoid News Events
During major news:
- Spreads widen significantly
- Consider avoiding trading
- Or use wider stop loss
Summary
Spreads are the primary cost of forex trading. Understanding spreads helps you choose the right broker, optimize trading costs, and improve profitability.
Key Takeaways:
- Spread = Ask - Bid
- Lower spreads = Lower costs
- Trade major pairs for tight spreads
- Trade during active sessions
- Compare broker spreads
- Factor spread into risk/reward