What is spread in Forex?
If you are interested in forex trading or have already tried yourself as a trader then the phrase ‘’forex spread’’ is certainly familiar to you.
Don’t worry if it didn’t tell you anything or if you first heard this after reading the line above - in this article we are going to review the concept of spread and determine its significance in the process of trading foreign currency.
Let’s begin now.
What is spread in forex?
The difference between the prices that people are willing to buy and sell a currency for is called the spread. When you look at a price for a currency pair, you will see the variation between the buy and sell prices - this is what we call the spread.
The spread is measured in small movements called pips. The pip is the change in the fourth decimal place of a certain currency pair (or the second decimal place when trading pairs are quoted in Japanese yen). It’s not just the spread that determines how much your trade costs, but also the lot size.
Why does the forex spread change?
When you trade in Forex, you have to deal with a variable spread in many cases. This means that the difference between what people will pay and sell for a currency can change a lot. If there is a vital news announcement or something else that makes the market more volatile, the spread might go up. This can be bad because it means that your positions might close or you could get put on a margin call. The best way to stay updated with the news is by using the economic calendar which can be build-in your trading platform or given by a broker.
How to reduce the spread in Forex?
- Trade during favorable hours
Knowing the time of day when a currency pair is most active can help you find the lowest spread on that pair. For example, the EUR/GBP might move around in the Asian session, but the spread is usually much lower during the London session because there is more volume moving around at that time.
- Avoid buying unpopular currencies
When there are many market makers competing for your business, they will be more likely to offer narrower spreads on popular currencies like the GBP/USD pair than on thinly traded pairs. This is because there is more competition and liquidity in markets with high trading volumes, which leads to tighter spreads.
- Avoid news trading
If you’re trading a major pair around high or moderate-impact news, be prepared for widened spreads. Brokers will often increase their spreads in order to protect themselves from unpredictable market movements. To reduce the impact of these spreads on your trade, try to avoid entering into a position right before or after the news is released.
Spread is an important factor to consider when trading Forex. There is no need to think that it can become a kind of barrier between you and your successful trading. If you figure out how spreads work and use your knowledge in practice then you can reduce the risk and improve the chances of making high profits in trading.
Note that besides variable spreads you can check out the lowest spreads as well. The brokers that offer the lowest spreads are companies with low costs in comparison with others in the forex industry. See zero spread forex broker to find out more.