The “spread” in forex trading refers to the difference between the bid price (the price at which you can sell a currency pair) and the ask price (the price at which you can buy a currency pair). It represents the transaction cost or the brokerage fee associated with executing a trade in the forex market.
In other words, the spread is the amount that the market maker or broker charges for facilitating the trade. This cost is not paid directly as a commission but is built into the pricing of the currency pair. The spread is typically measured in pips and can vary based on factors such as the currency pair being traded, market volatility, and the broker’s pricing model.
There are two main types of spreads:
- Fixed Spread: Some brokers offer a fixed spread, which means that the difference between the bid and ask prices remains constant regardless of market conditions. This can be helpful for traders who want consistent trading costs.
- Variable Spread (Floating Spread): A variable spread changes based on market conditions. During times of high volatility or low liquidity, the spread may widen, increasing the trading cost. When market conditions are stable, the spread is often narrower.
For example, if the EUR/USD currency pair has a bid price of 1.2000 and an ask price of 1.2002, the spread is 2 pips. This means that when you open a position, the trade starts with a small negative balance equal to the spread.
It’s important to consider the spread when planning your trades, especially for strategies that rely on small price movements to generate profits. A narrower spread is generally more favorable for traders, as it reduces the cost of entering and exiting positions. However, it’s also important to balance the spread with other factors such as the quality of execution, customer support, and the overall trading conditions offered by your chosen broker.