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3 Things You Need to Know About Forex Spread

June 01, 2012 | Comments: 0 | Views: 158

At the minimum your forex broker will charge you forex spread as their profit, other forex broker might charge commission and other charges but they earn primary from your trades through the spread.

Remember these 3 simple things to better understand forex spread

1.Forex spread is the difference between the bid price and the ask price. There are forex brokers who charge a fix spread across the currency pairs while most brokers charge a variable spread.

To illustrate how to compute the spread compare the bid price and the ask price. Let's take the euro-usd quote of bid price: 1.2567 and ask price: 1.2570, the spread is 3.0 pips or $3 for every 10k lot size.

It is highly recommended to choose a forex broker that charge minimal spread to lower fix forex spread and avoid brokers that charged more than the forex spread like commission and other fees.

2.Forex spread is the primary profit your forex broker earns every time you trade.

To illustrate let's say you are buying euro-usd, assuming the above quotation for euro-usd, you will buy at the ask price of 1.2570 and the moment you bought it and assuming the price quotation above did not change, you will already register a 3 pips loss because you can only sell it at the current bid price of 1.2567, the 3 pips difference or the spread represent your loss and your broker's profit on your trade.

The same works in reverse when you are short selling the currency pair. To illustrate further, let's say you are short selling euro-usd, using the same quoted price above, you will sell it at the bid price of 1.2567 and assuming the quoted price did not change you can close your short position by buying the euro-usd at the ask price of 1.2570, giving you a loss of the same 3 pips.

3.Forex spread is only charged to you once you close a trade, whether by selling the currency pair or closing your short position by buying the currency pair.

For those brokers that charge a fix spread you'll just have to account for the spread every time you make or close a trade but for those brokers that have a variable spread, you should avoid trading during volatile times like before, during and after a high impact news announcement like the Non-Farm Payroll announcement every first Friday of the month. It can drive the spread from 10 to 50 pips or more in just a matter of seconds. Remember that any increase in the spread is directly benefiting your broker's profitability and directly impacting your profitability the opposite way.

Remember these three basic but vital things about forex spread and it can guide in choosing your trades to ensure you get the most of out of it, avoid paying very high forex spread by not trading during the wild and volatile movement of the market at certain news announcement and choosing to trade on calm market hours.

Find more useful forex trading tips at Also, make sure you're using the right broker by checking out list and info on forex broker.

Source: EzineArticles
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