Forex trading involves the buying and selling of currencies in pairs. The difference between the buying and selling price of a currency pair is known as the spread. In simple terms, spread refers to the cost of trading forex. The spread is taken by the forex broker and is usually expressed in pips, which is the smallest unit of measurement in forex trading.
When is spread taken in forex?
Spread is taken in forex trading every time you open a position. It is the difference between the bid price and the ask price of a currency pair. The bid price is the price at which the forex broker is willing to buy the currency from you, while the ask price is the price at which the broker is willing to sell the currency to you.
For example, let’s say you want to buy EUR/USD, and the bid price is 1.2000, while the ask price is 1.2005. The difference between the bid and ask price is 5 pips, which is the spread. This means that if you buy EUR/USD, you will pay the ask price of 1.2005, and if you sell EUR/USD, you will get the bid price of 1.2000.
The spread is taken by the forex broker as a commission for executing your trades. The broker earns money through the spread, and this is how they make a profit. The spread can vary depending on the currency pair, market conditions, and the broker’s policies.
Why is spread important in forex trading?
Spread is an essential factor in forex trading, and traders need to understand how it works. The spread affects the profitability of a trade, and a high spread can decrease your profits or increase your losses. Therefore, it is crucial to choose a forex broker with low spreads, especially if you are a day trader or a scalper.
The spread also affects the entry and exit points of a trade. When you enter a trade, you need to consider the spread to determine the actual price of the currency pair. This means that you need to add the spread to the ask price if you are buying or subtract it from the bid price if you are selling.
For example, if you want to buy EUR/USD, and the ask price is 1.2005, and the spread is five pips, you will pay 1.2010 (1.2005 + 0.0005) to enter the trade. Similarly, if you want to sell EUR/USD, and the bid price is 1.2000, and the spread is five pips, you will receive 1.1995 (1.2000 – 0.0005) when you exit the trade.
Spread can also affect the stop loss and take profit levels of a trade. Traders need to consider the spread when setting their stop loss and take profit levels to ensure that they are realistic and achievable.
Conclusion
In conclusion, spread is an essential factor in forex trading, and traders need to understand how it works. The spread is taken by the forex broker as a commission for executing your trades, and it affects the profitability of a trade, entry and exit points, and stop loss and take profit levels. Therefore, it is crucial to choose a forex broker with low spreads, especially if you are a day trader or a scalper.
