Where does the spread go? Is it a cost for the trader?
Yes. You pay more to buy a position and you get less when you sell it. The difference is the spread and its profit for the broker.
Be aware that spreads can change without warning and any broker will definitely widen their spreads during even a normal and quiet day - around market open and closing times, around news announcements, during times when prices are moving quickly. The ratio between “normal” spread and the spread at certain times of day can be as much as 10x.
A spread is simply defined as the price difference between where a trader may purchase or sell an underlying asset. Here is an example of the forex spread is calculated for the EUR/USD. For example, bid price is 1.10345 and ask price is 1.10353. So the spread in this case is 0.00008. You should remember that the pip value is identified on the EUR/USD as the 4th digit after the decimal, so the final spread calculated as 0.8 pips.
Spread is depends on liquidity, current market situation. It can be fixed or variable. Fixed spread is a constant value regardless of currency fluctuations. This type is set on the most liquid currency pairs where average spread fluctuations are not significant. Fixed spreads allow traders to rely on a strategy without worrying about unexpected variables.
A variable spread is set by the broker within the lower limit and may fluctuate or be influenced by changes in the currency value. The value of variable spread depends on the current market situation, including the volatility level. The size of a spread increases due to significant price movements. And it provides better pricing by dealing with prices from different liquidity providers.
In order to understand spread you have to first understand BID: The price at which you purchase. ASK: The price at which you sell. (ASK>BID) and Spread = ASK - BID. This difference represents the cost of brokerage or simply putting, Spread is how your broker makes his living.
Whta might it easier is to take a step back and ask yourself "If someone is providing you a service of value, that person needs to be compensated in some way, how does this person get compensated?’
If you’re an FX trader who wants to speculate on currency exhange rates, you need access somehow to get your hands on the currencies you want to trade.
For example, if you want to buy EUR/USD, someone has to sell you some.
This someone isn’t going to give you some at the same price she got it for.
She’ll add a markup to make some profit.
That’s the “spread”.
Yeah, correctly put. Spread is like a cut for the broker.
Some brokers offer fixed spreads with commission, maybe better for some traders.
It’s great to see that other experienced traders have answered your question and shared their knowledge regarding spreads. I hope things have become clearer for you now.
Should you need additional help, please feel free to check out BabyPips.com’s School of Pipsology’s lesson “What is a Spreadin Forex Trading?”
Hope this helps!
Can I chip in and ask a question… I’ve got a good understanding of the ‘spread’.
I would just like to clarify… the spread when closing a trade is the spread you are being ‘charged’ so to speak?
Its like when you buy bread at a shop. The spread is the difference between how much the shopkeeper paid the baker and how much you pay the shopkeeper for the same loaf of bread. Obviously you pay more than the shopkeeper, otherwise he would not bother starting a shop.
Unless…the shop is really just a front for the casino operating in the back.
I am new to forex too. Although I am investing in other platforms, I am learning to trade on my own. Are already trading on a live account?
I agree here, this option with a fixed spread is much better
The concept of spreads totally confused me too at first but this site explained it so much better and I was finally able to understand. I saw that some people already explained the technical side of it, so just keep in mind:
-The average spread on EURUSD is 1.5 pips so you can compare this when considering brokers to get a better idea of whether their spread is competitive or too high
-Some brokers offer fixed spreads but it’s more common to see floating spreads. The idea of a fixed spread may seem better but in my opinion they tend to be higher (others may disagree)
-In some cases you may find a broker that doesn’t charge commissions. In a lot of cases, those costs will be built into the spread, which will make it seem higher. Some people prefer this and it can make it simpler to keep up with costs.
Just found this free online forex training which, to me was very helpful and they explained a lot of things
As an answer to your question you got Lesson 13 explained very clear here
The forex spread is the difference between a forex broker’s sell rate and the buy rate when exchanging or trading currencies. Brokers can add to or widen their bid-ask spread, meaning an investor would pay more when buying and receive less when selling.
The forex spread is the difference between a forex broker’s sell rate and the buy rate when exchanging or trading currencies. Spreads can be narrower or wider, depending on the currency involved, the time of day a trade is initiated, and economic conditions.