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Why are tight spreads important?
Written by: PaxForex analytics dept - Friday, 27 June 2014 0 comments
One of the most important factors which plays an important role in determining the profitability of your forex trades are spreads. Nothing else affects the transaction costs of forex trading more than the spreads which are offered by your forex broker. Foreign exchange trading spread by definition is the difference between the ask price (the price you buy at) and the bid price (the price you sell at) which is quoted in the pips.
The forex trading spread is how brokers make their money. Wider foreign exchange trading spreads will result in a higher asking price and a lower bid price which means that you will pay more when you buy and get less when you sell. The lower the spread the better it is for you as a forex trader as it means you are making more money per successful trade.
Foreign exchange trading spreads affect the return on your forex trading strategy in a big way. Some traders seek to capture small gains quickly and at multiple intervals during the trading session. This strategy is typically referred to as ‘intraday trading’ and without cheap
trading costs this type of investment strategy is almost impossible to implement successfully over the long term.
There are some long term traders who will say that one or two point difference in the spread for a trade is insignificant for the most part and that what traders should be most concerned about is the reliability of a broker’s trading platform to execute trades as they are ordered. You as a forex trader should know that no matter what the trading strategy, higher costs mean higher costs and the individual trader will have to pay these charges.
You also have to be aware that the forex market operates in a different manner from other financial markets when it comes to economies of scale. Larger orders don’t necessary mean lower spreads for the traders. When it comes to choosing a forex broker who offers the tightest spreads it can be very difficult because different brokers offer different spreads and not necessary deliver the offered value of their spreads.