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How spread works in forex?

The foreign exchange market, often abbreviated as Forex or FX, is the largest and most liquid financial market in the world. It is characterized by the buying and selling of currencies, with the aim of making a profit from the fluctuations in their exchange rates. One of the key concepts in Forex trading is spread, which refers to the difference between the bid and ask prices of a currency pair. In this article, we will explore what spread is, how it works, and how it affects Forex traders.

What is Spread?

Spread is the difference between the bid and ask prices of a currency pair. The bid price is the price at which traders can sell the currency, while the ask price is the price at which traders can buy the currency. The difference between these two prices is the spread. In other words, the spread represents the cost of trading, as traders must pay this amount to the broker for executing their trades.


How Does Spread Work?

The spread is determined by a number of factors, including the liquidity of the currency pair, the trading volume, and the volatility of the market. Highly liquid currency pairs, such as EUR/USD, tend to have lower spreads than less liquid pairs, such as USD/ZAR. Similarly, currency pairs with higher trading volumes tend to have lower spreads, as there is more competition among traders to buy and sell these pairs. On the other hand, currency pairs that are more volatile tend to have wider spreads, as there is more risk involved in trading them.

Forex brokers typically make money by charging a commission on each trade, or by marking up the spread. In the case of the latter, the broker will add a certain number of pips to the spread, which represents their profit on the trade. For example, if the bid price for EUR/USD is 1.2000 and the ask price is 1.2005, the spread is 5 pips. If the broker marks up the spread by 1 pip, the new spread would be 6 pips, and the trader would pay an extra 1 pip for each trade.

How Does Spread Affect Forex Traders?

Spread is an important factor to consider when trading Forex, as it directly affects the profitability of trades. The wider the spread, the more traders will have to pay in trading costs, which can reduce their profits or increase their losses. For example, if a trader buys EUR/USD at 1.2005 and the spread is 5 pips, the trader would need the price to rise to 1.2010 just to break even on the trade. If the spread was wider, say 10 pips, the trader would need the price to rise to 1.2015 just to break even.

In addition to affecting the profitability of trades, spread can also impact the speed and efficiency of trade execution. When trading Forex, traders often try to enter and exit trades quickly to take advantage of short-term price movements. However, if the spread is too wide, it can take longer for trades to be executed, which can lead to missed opportunities or increased slippage.


Spread is a fundamental concept in Forex trading, as it represents the cost of trading and affects the profitability of trades. Traders should always be aware of the spread when entering and exiting trades, and choose brokers that offer competitive spreads and fast execution times. By understanding how spread works and how it affects Forex traders, traders can make more informed decisions and improve their overall trading performance.


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