In Forex trading, the spread is the difference between the offer (sell) and the bid (buy) price of a currency pair in the supply and demand structure.
There are always two prices in a currency pair, the bid price and the bid price. The bid price is the price at which you can sell the base currency, while the bid price is the price you use to buy the base currency.
The base currency is shown on the left of the currency pair, and the cross-currency or variable is shown on the right. This pairing tells you how much of the variable currency is equal to one base currency.
The listed purchase price will always be higher than the listed selling price, while the market price is something in between.
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Most Forex currency pairs are traded free of charge, but spreads are a fee that applies to every trade you make. All leverage providers include a spread in the transaction costs instead of a fee, as they charge a higher price than the bid price. The size of the spread can be affected by a number of factors, including which currency pair you are trading with and how volatile it is, the size of your business, and which provider you are using.
Some of the major Forex pairs are:
EUR / USD
USD / JPY
GBP / USD
USD / CHF
What does spread mean?
The spread is measured with a pip, which is a small unit of movement at the price of a currency pair, and the last decimal digit of the pricing (equal to 0.0001). This is true for most currency pairs, with the exception of the Japanese yen, where the pip is the second decimal place (0.01).
When there is a wider spread, it means that there is more difference between the two prices, so there is usually little liquidity and a lot of volatility here. On the other hand, fewer spreads indicate low volatility and high liquidity. Therefore, when trading a currency pair with a more intense spread, the price of the spread spreads less.
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When trading, spreads can be variable or fixed. For example, indicators have fixed spreads. The spread is variable for Forex pairs, so the spread also changes when the bid and ask prices of the currency pair change.
Some of the advantages and disadvantages of these two types of spreads are as follows:
|May face ricotta
|No risk of ricotta
|Predictable transaction costs
|It can have a stronger spread than fixed
|Requirements for less capital
|It can reveal market liquidity
|More suitable for novice traders
|More suitable for experienced traders
|An unstable market will not affect the spread
|If there is a lot of fluctuation, the spread can spread quickly
The spread is calculated using the latest large digits of the sale price, with a given price. The last large number in the image below is 3 and 4. When you trade Forex or any other asset through CFD or spread betting account, you pay the full spread in advance. This compares to the commission paid on a CFD transaction, which is paid on both entry and exit. The more spreads, the better value you will gain as a trader.
for the dollar / pound currency pair, the bid price is 1,26739 and the bid price is 1,26749.
If you subtract 1.26739 from 1.26749, it equals 0.0001.
Since the spread is based on the last major digit in the price, the spread is equal to 1.0
Forex spread indicators
The spread index is usually displayed as a curve on the chart to show the direction of the spread in relation to the price and the bid price. This helps the spreads in the Forex pair to be visualized over time, while the most liquid pairs are stronger spreads and the more alien pairs have wider spreads.
Factors that can affect the spread of Forex include market fluctuations that can cause changes. For example, important economic news can strengthen or weaken a currency pair – thus affecting spreads. If the market is volatile, currency pairs may diverge or currency liquidity may decline, so spreads will expand.
Keeping an eye on the economic calendar can help you prepare for a wider spread. By knowing what events may cause a currency pair to become liquid, you can make a learned prediction about the increase in their volatility, and therefore you may see more spreads. However, it is difficult to prepare for new news or unexpected economic data.
There are also fewer spreads for high-volume currency pairs, such as major dollar-denominated currency pairs. These pairs have higher liquidity but can still be at risk of spreading spreads if there is economic fluctuation.
In major market trading sessions, such as the London, New York and Sydney sessions, spreads are likely to be lower. In particular, the expansion can still be strong when there is an overlap, such as when the London meeting ends and the New York meeting begins. The spread is also affected by the supply and demand of currencies – if there is a high demand for the euro, the value increases.
Spreads and margins
If the Forex spread spreads dramatically, you run the risk of getting a call margin and, in the worst case, your account being terminated. When the value of your account falls below 100% of the margin level, a margin margin announcement occurs, which means that you can no longer meet the trading needs. If you reach 50% below the margin, all your positions may be dissolved.
So it is important to evaluate the amount of leverage you are trading and the size of your position. Forex pairs are usually traded higher than stocks, so it is important to be aware of your account balance.
A Forex rate is the difference between the bid price and the asking price of a currency pair and is usually measured in pips. It is important to know what factors are driving the spread of Forex trading. Major currency pairs are traded in large volumes, so they have smaller spreads, while foreign currency pairs have wider spreads. Refer to the risk management guide when trading.
We offer competitive spreads in a wide range of currency pairs, including major pairs such as Euro / US Dollar and Gable / US Dollar.
The rate of 1.4110 | 1.4112 for the EURUSD currency pair means that we:
We sell 1 Euro for 1.4110 immediately at Bid or buy 1 Euro for 1.411112 immediately at Ask. Both Ask and Bid rates are used for complete trading operations because opening or closing a trade requires the application of actions in different directions:
Opening a “buy” deal means buying, while closing a “buy” deal means selling. Also, opening a “sell” deal means selling, while closing a “sell” deal means buying.
Do not forget that charts always show Bid rates. Ask rates are always higher than Bid rates. As mentioned above, the spread is the difference between Ask and Bid rates. The spreads of different currency pairs are different from each other. Spread size is measured with a pipe. In our example for the EURUSD currency pair, the spread is equal to 2 pips.
Types of Forex spreads
Once you understand what spreads are and what the price of Ask and Bid is, you should now know the types of Forex spreads. One of the most important factors in choosing a brokerage is Forex broker spreads. Because if the spread is high, it will cause significant losses in customer transactions. Forex brokers offer different types of trading accounts. Forex brokers offer different types of trading accounts with different types of spreads. These spreads are classified into two categories:
- Broker with fixed spread
- Broker with floating spread
Fixed spreads, as the name implies, do not change depending on time or normal market fluctuations. However, if the market liquidity is low or fluctuates sharply, the spread may change temporarily, in other words, it will move to a new fixed spread level. If the market returns to normal, then the spread will return to normal. However, trading with a fixed spread, despite these rare conditions, is easier and more profitable for customers because it has more predictability and less risk.
Brokerage companies in recent years, due to increasing competition, are constantly trying to offer innovations to their clients, innovations that are also related to spreads. In this regard, the number of companies that are using floating spreads is also increasing.
Floating spread in Forex is a value that always varies between Ask and Bid rates. Floating spread is the full manifestation of the market and, above all, the manifestation of the interbank communications that are represented by it. For this reason, a number of companies offer floating spread trading accounts called ECN (Electronic Communication Network) accounts. An ECN Forex broker offers a platform in which market participants, including banks, market makers, market makers, and private investors, trade with each other by placing buy and sell orders in the system. Customers typically have lower spreads on the ECN platform but are also paying a fee to the broker for their trades.