What is the ‘Spread’ in Forex trading?
The spread in Forex is the difference between the ‘buying’ and ‘selling’ price. It is the cost of trading for a trader and one of the main sources of income for a Forex broker. When trading the buy price is usually higher than the sell price. The buy price is on the ‘ask’ while the sell price is on the ‘bid’. The spread is typically presented in PIPs. The lower the spread the more lucrative this is for traders as they will achieve a lower cost of trading.
The broker does not choose the price of the spread. It will come from higher sources such as the liquidity provider whom will have multiple factors that derive the price of the spread. The price you receive will be a marked-up price of the real spread. The more frequently traded currency pairs such as EUR:USD receive the best spread rates. This is due to the liquidity that these currency pairs provide. There is risk for the liquidity provider and broker in their job to match your trade with the opposite side of that trade.
Brokers are very competitive with their spread rates. Traders are always looking for the brokers with the best spread rates along with their other services provided. With large volumes being traded, the spread rates can add up and it is important to understand what you’re being charged.
You will either have a variable or fixed spread when trading. A variable spread is when the spread changes constantly. This is sometimes in your favour and other times not so. The fixed spread is a fixed rate that your broker will charge respective to a specific currency pair. Another popular option with professional traders is to opt for a ‘real-spread’. This is when the broker provide the trader with the ‘real spread’ that they are receiving from their liquidity provider. Instead of charging spread the broker will instead charge commission per trade. This is usually similar to what would be charged in their marked-up spread rate. This is a favourable option for those use the scalping trading strategy, where the difference between the buy and sell rate can be hugely important.
- The spread is the difference between the ‘Buy’ and ‘Sell’ price.
- It is important for a trader as the spread is the ‘cost’ of trading.
- There can be a variable or fixed spread.
- The more liquidity, the lower the spread, resulting in a lower cost.