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Forex spread: what is it and what are its main types?

 

 

We continue to study the basics of the foreign exchange market and in this article we'll talk about what a spread is on Forex and how to take it into account in the trading process, namely when you need to add or subtract the spread value from the set take profit and stop loss orders , etc.

The spread on Forex is, in fact, one of the basic concepts that a trader needs in order to master the principles of trading in the foreign exchange markets and stock exchanges. The very concept of "spread" is used in this context to denote the difference between the most favorable prices for buying and selling a particular asset at a certain moment.

In fact, the size of the spread on Forex is defined as the difference between Bid and Ask (selling and buying prices, respectively) of a certain currency instrument (or currency pair in the Forex market).

As a rule, in the foreign exchange market, the spread value is indicated not in monetary units, but in special points (or pips - pips), considering such an expression to be more convenient for comparison.

To more clearly understand what a spread is, let's run an example with an exchange office (I think everyone has ever exchanged currency).

For example, the cost of buying one unit of a certain currency (Euro) in the exchanger is $ 1.45, and it is sold for $ 1.4. If we consider the size of the spread in money, then it will be $ 0.05 (1.45 - 1.4 = 0.05), and is the net profit of the exchanger, i.e. his earnings.

If we consider the value in points based on the example above, then in this case the spread is 5 points (with such 2-digit quotes).

 

How the spread is charged for long and short positions in MT4

The situation is identical in the Forex market, the spread is the difference between the buy and sell prices, and goes as a commission to your broker, i.e. this is his earnings. In this case, it does not matter whether the trader makes a profit or loss, the main thing is that for each open deal, the value of this commission is charged (this value depends on the type and selected currency pair)

 

For example, let's take about the MetaTrader 4, When we open a new order, we see 2 prices:

In our case, the spread is 2 points (1.3053 - 1.3051 = 0.0002, with 4-digit quotes).

When a trader opens a Buy deal, the broker charges the spread size at the time of its opening. In all cases of opening a new buy position for any currency pair, the trader sees a negative result (with a minus) on his trading account.

That is, having opened a new Buy position, it loses by the amount of the spread.

Then to achieve a zero result, the price must travel the distance in the direction of the open position by exactly the amount of the spread, in our case by a few pips (depending on the currency pair).

 

Accordingly, in order for a trader to profit from this open position, the price level must be higher than the specified value of the spread (+ several points) and higher than the level of the open position.

This must be taken into account for the correct placement of stop loss and take profit orders when buying, that is, they must be increased by the amount of the spread from their current level.

When you open a Sell trade, the broker takes the spread when this trade is closed. Please note that the Bid sell price is the same as the price on the chart, and the Ask price will be used when closing a sell trade.

In this case, when selling, the price may not reach the set protective order by the value of the spread and close the deal. For example, if the stop loss level when selling is at the level of 1.3200, then the price when it approaches it will close the deal at 1.3197 with a spread of 3 points.

 

For the take profit when selling, the price will close the position only after passing the profit taking level by the amount of the spread below its current level.

Accordingly, for the correct placement of stop loss and take profit orders when selling, their levels must also be increased by the amount of the spread from their current level, only now in the opposite direction compared to buying.

To summarize the above, then you need to remember the main thing: that in the process of trading, when buying - the spread on Forex is charged at the time of opening positions, when selling - at the time of closing these positions.

 

Types of spreads on Forex

Regarding the size of the spread, we can say that it is a dynamic value. It is influenced by various factors, such as: the liquidity of the currency instrument, the volume of the transaction, the type of trading account with the chosen broker and the state of the Forex market itself.

There are several types of spreads in the Forex market:

  1. Fixed spread - that is, the size remains the same, regardless of situations in the Forex market. This type is usually set by brokerage companies for micro and mini accounts. By the way, among the popular intermediaries in the Forex market with a fixed spread, the broker Alpari should be noted. By the way, this broker has its minimum size. For popular currency pairs, a spread of 1.5 pips for the EUR / USD pair, 2.5 pips for the GBP / USD and 1.6 pips for the EUR / GBP pair is removed here. InstaForex, on the other hand, has a fairly high fixed spread - 3 pips for the currencies EUR / USD, GBP / USD and EUR / GBP.
  2. Fixed spread with expansion - the calculation option implies that its value may change, depending on the state of the market at a certain moment. That is, if it is equal to three points, then after the release of important financial news, it may expand to five points.
  3. Floating spread on Forex, as a rule, is 2 pips in case of a stable situation in the currency market. At the same time, its size can grow up to 45-50 points during sharp market fluctuations. This type is more typical for EC brokers. In addition, floating spreads are often used by banks as well.

 

The spread on Forex can be of different volume, depending on some factors. For example, the liquidity of currency pairs: for the main pairs on Forex, the spread can be just a couple of pips. It also affects the size of the spread and the volume of transactions - a wider spread is charged for small and very large transactions. In addition, the current market situation has a huge impact on the volume of this indicator.

 

 

 

 

Published on: 9/17/20, 5:07 AM