Spread in Forex — Definition, Example, and How It Affects Trading
Spread in Forex — Definition, Example, and How It Affects Trading
Clear explanation • Practical example • Cost impact • Trading tips
Definition
In forex, the spread is the difference between the bid price (selling price) and the ask price (buying price) of a currency pair. It represents the broker’s fee for executing a trade.
Bid and Ask Price
- Bid Price: The price at which the broker will buy the base currency from you.
- Ask Price: The price at which the broker will sell the base currency to you.
Example
EUR/USD: Bid = 1.1050, Ask = 1.1052
Spread = 1.1052 − 1.1050 = 0.0002 = 2 pips.
This is the cost you pay when you open the trade.
Types of Spreads
- Fixed Spread: The difference between bid and ask remains constant, even during volatility.
- Variable Spread: The difference changes based on market conditions, often widening in volatile periods.
How Spread Affects Trading
The spread directly impacts your trading costs. When you enter a trade, you start at a small loss equal to the spread. The price must move in your favor enough to cover this cost before you make a profit.
Factors Influencing Spread Size
- Market volatility
- Trading session (spreads are usually smaller during London/New York overlap)
- Liquidity of the currency pair
- Broker type (ECN vs. market maker)
Reducing Spread Costs
- Trade during high-liquidity sessions.
- Choose pairs with naturally lower spreads like EUR/USD.
- Use a broker that offers competitive spreads.
Quick FAQ
Q: Is a lower spread always better?
A: Usually yes, but also check other costs like commissions.
Q: Why do spreads widen?
A: Low liquidity and high volatility cause brokers to widen spreads to manage risk.
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