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What is Spread on Forex?
Written by: PaxForex analytics dept - Monday, 28 July 2014 0 comments
The spread on Forex market is the amount of pips between the bidding price and the asking price. The spread is what Forex companies use to make money on every trade placed through their network. Since the spread takes a big part of Forex trader’s expenses, it is important to consider it to everyone who wants to be successful in the currency market. The smaller the spread, the more profitable trades you will have.Spreads in the Forex market is generally measured in points rather than in money. For example, if the current price of EUR/USD is listed as 1.31990/1.32010, then the spread there is 0.0002, or 2 points. Opting to measurement in points allows comparing the spreads on different financial instruments.
Traders distinguish kinds of spreads as broad and narrow. Spread called narrow if its value does not exceed 4-5 points. If it exceed these marks, when it calls narrow. However, this division is rather conditional.
On the size of the spread affects the liquidity of a currency pair: the more liquidity of the assets, the lower the spread, and vice versa. Lowest spreads observed in pairs EUR/USD, GBP/USD, USD/CHF, EUR/GBP, USD/ JPY, USD/CAD, EUR/JPY. There are two types of spreads on Forex: fixed and floating (variable). Fixed spread is a spread, which does not depend on the current market situation. Floating spread is a spread, the value of which may vary. On most pairs in the Forex market are set floating spreads.
Advantages of fixed spread: - You know in advance exactly how much you will pay for opening a position on a particular currency pair; - You are insured against sudden and dramatic situations of
To determine the level of fixed spread, the broker usually takes the value that is included in the period of the floating spread. Trading in such conditions, a Forex trader is sure that the spread will not expand, even if the level of market volatility increases. With the increasing volatility, floating spreads may be increased too (up to 8-10 points). By reducing the levels of volatility, floating spreads also decrease and may be a tenth of one point. Are there brokers or dealing centers without a spread? Spread is the main income of any broker. This commission fee that the trader pays each time when he opens a trading position. If the broker does not charge spreads, then you will pay any other additional fees.
What spread to choose? For traders who are guided by a long-term trade, floating spreads seem more beneficial. As the entry and exit points, they can choose the lowest moments of activity and get the lowest spread possible. For traders who prefer to work at medium time frames, fixed spreads will be more suitable. They can avoid excessive spreads in periods of great market activity. As for traders working at longer time intervals, it is actually not so important to them what kind of spread to use: in the long-term trade a difference of a few points does not play a significant role. Some experts believe that sometimes fixed spreads insufficiently stimulate traders, if the latter are prone to risky trading strategies.
PaxForex offers spreads that will be really suitable to any kind of Forex traders.