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What is Spread In Forex and How Does It Work?

what is forex spread

Whenever someone trades in Forex, there are many different things that traders’ should take into consideration before making any decisions. One of the most important things that need to be taken into account is Spread, but what is it exactly?

Spread definition

When trading in the Forex Market, traders purchase and sell different currencies for different prices. When doing so, traders are destined to see Spread on different currencies. This Spread is the difference between Ask and Bid prices. This is one of the most important things to consider when opening and closing trades.

forex spread explained

Why is Spread important for traders?

  • If a trader does not take the Spread into consideration, he might lose his profits because of it.
  • In most cases, the spread is dynamic, so traders need to find the best time to sell their assets for good profits.
  • If a broker does not have Spread, it means that there are other fees that traders will have to pay.
  • There are also fixed spreads that don’t change regardless of the market conditions. This is a good option for traders with small capital.

Thorough Spread Explanation

Whenever someone is trading on the Forex market, they constantly buy and sell different currencies. When doing so, they are likely to see that brokers have different buy and sell prices for one currency and this is Spread. Brokers usually don’t have many different fees that traders pay and to make profits, brokers implement these Spreads. What this means exactly is that trader might buy one currency for a set price and then if he wants to sell it back to the broker he will have to sell it for less than he bought it for.

With increasing competition, brokers started to offer zero-spread trading accounts in order to attract more users to their website. Usually, these zero-spread accounts come with other fees, such as fees for opening and closing positions. So when dealing with these types of accounts it’s best to take a look at other fees.

Example of Spread in Forex

To make definition of Spread even more clear, let’s look at one example. Let’s say that trader opened a market position for EUR/USD currency pair. At that time trader needed to pay 1.1053 to open this position. But for those who wanted to close their position at that exact time, the sell price was 1.1051. What this means is that traders were paying more when buying this pair than those who were selling it. So the Spread here was 0.0002 or 2 pips.

FAQs on Spread in Forex Trading

Is High Spread Good In Forex?

In general no. High Spread means that traders will make less profits as they will be selling their assets for way less. But high spreads usually are present with lesser traded minor currency pairs, and major pairs such as EUR/USD don’t have high spreads.

How to avoid Spread in Forex?

There are few ways traders can avoid spreads. One option is to find a broker that offers zero-spread account, but usually these types of accounts are offered to those who trade with large capitals and there are also other fees that they have to pay. Another option is to keep an eye on the market where Spread is dynamic and find a timeline where spread becomes zero or comes close to it. But usually this lasts only few seconds.

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