Understanding spread

Beginner Questions
1

Hello,

In a zero spread account, brokers charge a commission. For example, in ICMarkets, for 1 standard lot, they charge $7 as commission for EURUSD.

If I place a Buy/Sell trade with $1 lot on EURUSD, for a profit of 3 pips, it will be $30 - $7 = $23, and for a loss of 3 pips, it will be -$30 - $7 = -$37.

This is simple and easy.

With spread, brokers maintain a price difference between the Bid (Sell) and Ask (Buy) prices. So, if I place a Buy trade, it gets placed at the Ask price, and if I place a Sell trade, it gets placed at the Bid price.

Bid Price: 1.100
Ask Price: 1.200

If I place a Buy trade at the Ask price of 1.200 with 1 standard lot and make a 3 pips profit on EURUSD, then my profit will be $30, and vice versa for a loss, which will also be $30 (3 pips).

If I place a Sell trade at the Bid price of 1.100 with the same 1 standard lot and make a 3 pips profit on EURUSD, then I make the same $30 profit or $30 loss.

The difference is, in profit, I make $30 (account with spread) and $23 (account with zero spread). In loss, I lose $30 (account with spread) and $37 (account with zero spread).

So, if I am correct, then it is always good to use an account with spread. But why do most people prefer zero spread accounts?

1 Like
2

My understanding is “zero” spread accounts (which are not always zero spread but instead they are the best possible bid and offer the broker can provide) are suited best for day trading style of trader where people may be looking for 10 to 100 pips (or ticks)

And zero commission accounts could be better for those who trade using the daily timeframe charts and hold their positions longer for greater pips.

But to be certain you could do a side by side comparison with demo accounts and see which is better.

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3

Calculations like this very much depend on the spread. The spread will vary depending on time and sessions, and can sometimes be close, working in favour of the spread account. In other circumstances it will be wide, in which case a commissions based account may be a better choice. A commissions based account is clearly not suited for frequent trading, as you will pay commission on every open and close. However, with a wide spread, the costs might also be too high for frequent trading.