Spread in Forex Trading: Calculation & Strategy

The question of which is a better option between fixed and variable spreads depends on the need of the trader. This is because the variation in the spread factors in changes in price due to market conditions. The type of spreads that you’ll see on a trading platform depends on the forex broker and how they make money. The spread is usually measured in pips, which is the smallest unit of the price movement of a currency pair. Instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair you want to trade. To start trading on some of the best currency pairs in the forex market, we have provided a list of suggestions here.

We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. If you increase your position size, your transaction cost, which is reflected in the spread, will rise as well. Since spreads never change, you’re always sure of what you can expect to pay when you open a trade.

Furthermore, dramatic Spread widening can lead to margin call or liquidation. A margin call refers to a scenario wherein the trader can no longer avail of free margin. Therefore, leveraging the limit of the account is the best method of safeguarding against a widening Spread. Optionally, you can even hold on to Spread-widening until it becomes tighter or narrowed.

Forex Is Not Centralized

It’s important to note that the FX spread can vary over the course of the day, ranging between a ‘high spread’ and a ‘low spread’. To configure the system during initial handover easily, the banks widen the spread. After recovering the system, the spread gradually goes back to normal. When centers hand over the transaction, they don’t want to keep the same position as previous. It’s the time when London may want more Euros, NY wants to shift to Yen, and so on.

• You can go long or short, which means you can speculate on rising as well as falling currency prices.
• In just a fraction of a second, your spread could be substantially higher or lower than you thought, which could have a huge overall impact on your bottom line.
• Spread widens at 10 PM as its closing time of most of the markets.
• A spread is a built-in transaction cost that brokers use to make profits off of trades.
• Broker can make a statement in your contract that they cannot allow trading in case of high volatility news.
• It is not only the spread that will determine the total cost of your trade, but also the lot size.

The first currency is called the base currency, and the second currency is called the counter or quote currency (base/quote). In one of the most common definitions, the spread is the gap between the bid and the ask prices of a security or asset, like a stock, bond, or commodity. Spreads can also be constructed in financial markets between two or more bonds, cryptocurrency broker canada stocks, or derivatives contracts, among others. Here is a basic caclulator you can use to calculate spread and total trade cost. As you test out with demo you will just be able to tell by looking at your spreads on your MT4, CTrader, or whatever platform you use for your broker. Do your research check out our guide HERE but do your own as well.

Spreads in Finance: The Multiple Meanings in Trading Explained

However, the scenario would not exist during a regular trading session. Likewise, scalpers won’t find Variable Spread ideal as a widened scenario can significantly diminish profits and even enlarge enough to become unprofitable. Therefore, easymarkets broker the spread should depend on market scenarios, and traders should look out for a narrow spread in the market. Before understanding how forex and CFD brokers make money, it is important to understand the types of brokers.

Another disadvantage of Fixed Spread is Slippage, i.e., a broker’s inability to maintain a fee after the trader enters as it differs from the entry price. Wider spreads in the price of an underlying asset represent high volatility and low liquidity. On the other hand, a lower Spread indicates high liquidity and low volatility.

Spread Costs and Calculations

As you might have guessed, the main advantage of fixed spreads is their predictability. You will know exactly what you can expect to pay for each transaction on any given day, without any surprise fluctuations. Fixed spreads usually tend to have smaller capital outlay requirements, making them better suited to traders that might not have a large amount of cash to invest. In any form of financial market transaction, the bid price is the amount that a buyer is willing to pay for an asset. It is the “buy” price from the perspective of the forex broker.

Additionally, it will also reduce the profits and increase the losses made on a trading position. You have to pay the spread upfront whether you trade through CFD or spread betting account. This is the same as traders pay commission while trading shares CFDs. The traders are charged for both entry and exit of a trade. In this type, spread comes from the market and the broker charges for its services on top of it. In this case, the broker has no risk because of liquidity disruption.

Markets.com

As a result, forex brokers widen their spreads to account for the risk of a loss if they can’t get out of their position. Variable spreads are essentially the polar opposites of fixed spreads. They are spreads in which both the bid price and the ask price are constantly changing according to the market conditions. Variable spreads are imposed when a broker is not a market maker and gets all of their liquidity from various providers.

If a market is very volatile, and not very liquid, spreads will likely be wide, and vice versa. For example, major currency pairs such as EUR/USD will have a tighter spread than an emerging market currency pair such as USD/ZAR. However, spreads can change, depending on the factors explained next.

How much does trading cost?

It is the time when liquidity providers are busy unloading inventories to close the business day. To stop the market activity of small institutions, they tend to increase the spread. There are certain times in the forex market when spread peaks. These are the time of some financial news technologies for game developers breakout, low liquidity, and high volatility. For example, if the spread is 1.4 pips and you’re trading 5 mini lots, then your transaction cost is $7.00. So if you’re trading mini lots (10,000 units), the value per pip is $1, so your transaction cost would be $1.40 to open this trade.

The specialist, one of several who facilitates a particular currency trade, may even be in a third city. His responsibilities are to assure an orderly flow of buy and sell orders for those currencies, which involves finding a seller for every buyer and vice versa. Get tight spreads, no hidden fees, access to 10,000+ instruments and more. Get tight spreads, no hidden fees and access to 10,000+ instruments. The rise of Trump in the poll could come with voters more confident Trump can win the Republican nomination and carry the momentum to beating Biden.

Keep in mind that the wider the spread between the bid and ask price, the higher the risk inherent in the trade. Spreads can either be wide (high) or tight (low) – the more pips derived from the above calculation, the wider the spread. Traders often favour tighter spreads, because it means the trade is more affordable. We hope that this guide has managed to shine a light on the topic of spread and that it managed to give you some confidence for the long road ahead.