Forex trading is one of the most popular forms of trading in the world. It is a decentralized market, which means that it is not governed by any central authority. Instead, forex traders from all over the world trade currency pairs through a network of banks, brokers, and other financial institutions.
When trading forex, you will come across the term “spread” quite frequently. The spread is the difference between the bid and ask prices of a currency pair. In other words, it is the cost of trading forex. The spread is usually measured in pips, which is the smallest unit of measurement in forex trading.
So, how many times does spread cost charged in trading forex? The answer is simple – every time you open a trade. Let’s take a closer look at how the spread works and how it affects your trading.
Understanding the spread
As mentioned earlier, the spread is the difference between the bid and ask prices of a currency pair. The bid price is the price at which you can sell a currency pair, while the ask price is the price at which you can buy a currency pair.
For example, let’s say that the bid price for the EUR/USD currency pair is 1.1000, and the ask price is 1.1005. The spread in this case is 5 pips. This means that if you want to buy the EUR/USD currency pair, you will have to pay 1.1005, which is 5 pips higher than the bid price. Similarly, if you want to sell the EUR/USD currency pair, you will receive 1.1000, which is 5 pips lower than the ask price.
The spread is the main source of income for forex brokers. Forex brokers make money by charging a commission or markup on the spread. The commission or markup is usually a fixed amount per lot traded or a percentage of the spread. For example, a broker may charge a commission of $5 per lot traded or a markup of 1 pip on the spread.
How the spread affects your trading
The spread can have a significant impact on your trading performance. The wider the spread, the more you will have to pay to enter or exit a trade. This can reduce your profitability, especially if you are trading with a small account.
For example, let’s say that you want to buy the EUR/USD currency pair with a lot size of 0.01 (which is equivalent to 1,000 units of currency). If the spread is 2 pips, you will have to pay $0.20 to enter the trade (2 pips x $0.10 per pip per lot). If the spread is 5 pips, you will have to pay $0.50 to enter the trade. This may not seem like a big difference, but it can add up over time, especially if you are a frequent trader.
The spread can also affect your trading strategy. If you are a scalper, who aims to make small profits from multiple trades, you will need to pay close attention to the spread. A wider spread can make it harder to make a profit from scalping, as you will need to make up for the spread before you can make a profit.
Conclusion
In conclusion, the spread is the cost of trading forex, and it is charged every time you open a trade. The spread is the difference between the bid and ask prices of a currency pair and is usually measured in pips. The spread can have a significant impact on your trading performance, as it can reduce your profitability and affect your trading strategy. Therefore, it is important to choose a forex broker that offers competitive spreads and to pay close attention to the spread when trading forex.
