Forex spread: what is it and how does it affect the trading?
The term “Forex spread” has been heard by many traders. Many people know its value, but only a few really use the power of the Forex spread to its full potential. After all, correctly using low spreads, you can save tens and stoney dollars a month. And that means increasing the efficiency of their trading on the currency exchange. If the trader constantly overpays for the spread, then his money with each transaction goes to the broker, and the deposit reduces. Is it for this that people begin to engage in currency trading?
What is meant by the term “spread”? This is the difference, measured in points, between the purchase and sale price.
Each time, opening a new transaction through the MT4 trading terminal, we see 2 prices that differ from each other by several points, sometimes more. This is the Forex spread. The situation is similar to currency exchange in a bank or currency exchange office. For example, if we buy US dollars for rubles, then we will be offered a dollar at 37.5 rubles. If we want to sell dollars for rubles, then their value will be 36 rubles for 1 USD. In other words, with each exchange we will lose some money.
On Forex the situation is similar. There is a bid and ask price, a purchase and a sale price. The difference between them is determined by the broker, the spread is his legal profit. He will leave part of this profit to himself, part will go away as an affiliate reward if there is a partner who has attracted a trader, and some will go to a larger broker or bank, which directly transfer transactions to the exchange and are suppliers of liquidity, i.e. quotes.
Sometimes the term “spread” is used, which is not entirely true. It’s correct to say “spread”, through “e”. But in principle, only understanding the essence of the term is important.
Forex brokers and spreads
Let's make a simple calculation of how much the trader overpays on average, working with a broker offering high spreads. Suppose a trader closes 10 deals for the GBP / USD pair during one trading session, the standard spread of which is 3 points. In total, 3 x 10 = 30 points are obtained - this is the money that the trader paid for the spread. We do not consider the cost of 1 point, since it will differ for different types of accounts. But one thing is certain with certainty: 30 points is about profit from one successful transaction.
If the trader trades through a broker who set a GBP / USD spread of 4 points instead of the standard 3 points, then the overpayment (our loss) will be 4 x 10 = 40 points.
With each transaction, these losses will accumulate, pouring out at the end of the reporting period, for example, a month, into a tidy amount. We hope you now understand the significance of these “cheap” items.
It is worth adding that during the release of important news the broker expands the spread, sometimes up to several tens, sometimes even hundreds of points. It turns out that our “overpayment” will be even greater.
What is the way out?
In order not to overpay huge spreads and not lose money on Forex, but to earn it, you need to choose a broker with optimal trading conditions. In addition to the minimum spread, it is important for the trader to have a large leverage, minimal negative or good positive swaps, high speed of opening deals, etc.