Advertisement

Advertisement

What is Forex Spread?

Advertisement

What is Forex Spread

Some newcomers wonder what the term "Forex Spread" means. Although this term may seem complex to the average person, it is, in fact, very simple. However, in spite of its simplicity, it is an important element in Forex trading because profits and losses depend on the spread applied to currency pairs.

the definition
Forex Spread is the difference between the price of buying a currency pair from the market (the question) and the price of selling the pair to the market (bid). For this reason it is usually called a tender spread / question. The price of the question is usually higher than the price of the tender, which causes the trader to bear a slight loss once the deal is opened, whose size is determined on the basis of the spread imposed by the broker. For this reason, it is important to understand all aspects of Forex trading with the search for brokerage firms that offer the lowest possible spread rates.

What is Forex Spread?
What is Forex Spread

Examples of Spread calculation
EUR / USD SPRED with 4 decimal places in the quote: question price 1.4102, bid price 1.4100, spread 1.4102 - 1.4100 = 0.0002 or 2 pips.

GBP / JPY spread with 2 decimal places in the quote: price of question 134.17, bid price 134.11, spread 134.17 - 134.11 = 0.06 or 6 points.

Spread EUR / USD with 5 decimal places in the quote: Ask price 1.41023, bid price 1.41004, spread 1.41023 - 1.41004 = 0.0019, 19 pips fractional or 1.9 common points.

USD / JPY spread with 3 decimal places in the quotation: question price 86.782, bid price 86.770, spread 86.782 - 86.770 = 0.012 or 12 fractional points or 1.2 common points.

How to take advantage of your Forex trading knowledge
You should put the cost of the spread into consideration when developing your Forex trading system, keeping in mind that opening the position of the buying center uses the price of the question while opening the sale at the bid price. For example, if a trading system requires placing a stop loss order at 20 pips and a profit taking level of 50 pips, you will have two ways to do so:

You can add the profit taking value to the opening level (or deduct it in the case of a sell position) and put stop points at the same level (or add them in the case of a short position). In this way you maintain the profit / loss ratios but at the same time increase the probability of hitting stop levels while reducing the likelihood of the price reaching the profit taking level.
Alternatively, after doing the above steps, you can deduct the spread from the profit taking and stop loss (or adding the spread in the case of the sales positions). This method will maintain the possibility of activating stop loss or profit taking levels but will reduce the profit achieved when the price reaches the profit taking level and increase the loss incurred in case of hitting the stop level.

No comments:

Powered by Blogger.