Because I didn’t understand the part of where it says “widen the spread”
“In order to prevent this from happening, the specialist will simply widen the spread or increase the transaction cost to prevent sellers from entering the market.”
Can someone explain to me so that I understand
and Define a specialist in forex trading terms.
Spread is the difference between the price at which something can be bought and the price at which it is sold. In trading the buy price is often called the ask price, the selling price is often called the bid price: sometimes therefore the spread is called the bid-ask spread.
In forex trading, if you want to take a long position in e.g. AUD/USD, you would need to pay 0.6755. If you wanted to close that position immediately, you would receive 0.6754. So the spread is 0.0001: this is also called 0.0001 on this pair is 1 pip.
But be aware that the spread changes through the day. It will not often get narrower than 1 pip for AUD/USD but it will get wider, such as when large markets like London and New York are about to close or have just opened, or when news relating to the AUD or the USD is coming out.
A wider spread makes it harder to make a profit - right now price only need to move 1 pip in order for your purchase of AUD/USD to break even, and 2 pips for it to start making a profit. But of the spread is 8 pips, then price would need to move 8 pips for you to break even. Wide spreads are more common when there is not much trading activity going on which makes breaking even then even harder.
It is important to mention that the meaning and nature of spread in Forex is a bit different from other markets. If we speak about equities, spread is the difference (or, simply, the “distance”) between lowest offer and highest bid. Each of them defined by real orders placed by particular market participants. If someone would place an order inside the spread it would change, and if one of those buyers and sellers would remove his orders the spread would become wider. For equities markets spreads are often wide during extended trading hours or in some stocks with lack of liquidity.
At the same time it is important to understand that the nature of spread in Forex differs substantially. Since the broker acts as a counterpart to each trade, it sets spread in accordance with current market conditions. That is why it could suddenly becamoe wider or tighter - in such way broker protects its risk for the case of unexpected price movement. The understanding of this principle is important for those who are going to backtest thier own strategies using historical data. In this case they would need to use data provided by their broker to get relaible enough testing results.
Very good explanation.Now a technical question.
If I enter a trade with a high spread and exit with a low spread, how is that calculated.
Or other way round
Fair question. The price quoted at the moment of entry or exit is what you pay or receive. So you could in theory buy on a wide spread and sell on a narrow spread and make a profit even though on the chart the price has not moved at all. But this is just theory - the firms we trade with make their own quotes and don’t normally make that kind of mistake.
Unless you know different?..
O k. So if I close a transaction at the wrong time such as with a news release, I might find my profit is not what I expected. I have seen the spread widening extremely with a major news release.
Thanks Tommer