Spread in the Forex and stock markets is one of the important indicators for those who actively trade all day long. For conservative traders, the spread has less impact. In this article we will talk about what it is, what it is like and what to do about it.
1. What is an exchange spread in simple words
Exchange spread(from the English "spread") - this is the difference between the current purchase price (Ask) and sale price (Bid) in financial markets
The spread is measured in points. Each pair has its own precision. Most often, currency pairs on Forex are 5-digit. For example, in the screenshot below, the euro/dollar (EURUSD) pair has a difference between Ask and Bid of 10.
Each broker has a table with specifications that indicate the minimum spread values. It is impossible to determine the maximum, because during periods of high volatility it can reach high values.
In stock markets, the spread depends entirely on the liquidity of the securities (stocks and bonds). During the day, this value can vary greatly and range from 1 kopeck or more. In the order book, you can see what volume is offered for sale/purchase. In Forex, we do not see the depth of market prices and volumes.
2. Types of spread
- Fixed - a predetermined value that does not change regardless of the situation and volatility in the market
- Floating - changes constantly throughout the day depending on the market situation. During periods of low volatility it usually narrows, and during periods of high volatility it expands up to hundreds of points.
Almost all brokerage accounts offer a floating spread option. This should have little effect on your trading results unless you are scalping (making a large number of trades).
Which spread to chooseIn my opinion, a floating spread is even better, since it allows you to profitably enter the market during periods of calm.
3. What affects the spread size
The floating spread is different every second. Let's look at the factors that influence its size:
- Trading account type (Standard, ecn, pro). The steeper the account, the smaller the spread. But there are big requirements for a cool account in terms of the amount of money on it.
- Liquidity of the instrument. The greater the trading volume, the smaller the spread. You can conduct a mini analysis yourself and see the size of spreads for different pairs. You will notice that the most popular pairs: EURUSD, GPBUSD, USDCHF, JPYUSD, AUDUSD, USDCAD have the smallest difference between Ask and Bid.
- Market volatility. When significant economic or political news is released, the spread can grow before our eyes from 10 points to 300 or even more. But these are short-term effects that last just a couple of seconds. But we must understand that this is also real and happening.
- Trading time. At night the spread is usually larger due to low liquidity. Also before the holidays you can see a similar picture.
4. Are there any brokers without spread?
You can find a Forex broker without a spread, but there will be some exceptions. The broker still has to make money somehow and he will find other ways to do it. For example, it will make big
Spread (English spread "spread") - the difference between the best prices for the purchase (ask) and sale (bid) of any asset (currency, shares, futures, options, etc.) at the same point in time on the stock market or currency exchange.
Buy cheaper - sell more expensive. This rule has been familiar to people since 687 BC. e. – the time of the appearance of the first gold money. Even then, clever merchants managed to pay less for goods.
They ground the coins in a circle, keeping some of the gold for themselves. And full-fledged banknotes were accepted from buyers. This is how the precious metal ended up in the pockets of traders. Over time, to protect the coins, their edges began to be jagged. This made it possible to recognize money with less weight by touch and stop fraud.
And although coins have not been minted from gold for a long time, the tradition of making the edge ribbed has been preserved. Just like the rule of buying and selling at different prices, which is actively used in the Forex market. The difference between the purchase and sale prices is called a spread.
Ask and Bid – learning the Forex alphabet
Before studying the spread in detail, you need to understand how it is formed. The Ask and Bid lines will help you with this. It looks like this on the graph (Figure 1).
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In the Forex market, there are two prices at the same time: supply and demand. The best price at which traders are willing to buy an asset is called Ask. And the one for which you can sell it is Bid.
And here lies the first trick of brokers: the Ask price is not reflected on the chart by default! Thanks to this, the trader successfully forgets about the price difference and... makes money. You can enable the line in the Properties tab (F8 – General – Show Ask line). (fig2)
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Let's look at an example. Trader Kolya wants to sell €1000, but there are no people in his town willing to buy the currency. A broker (intermediary company) gives him access to a huge market with thousands of buyers. And he offers to sell the euro for $1,175.
Meanwhile, elsewhere in the world, trader Petya wants to buy just €1000. And that same broker sells him currency to Colin for $1,221.
Broker's income: $1,221 – $1,175 = $46. This is the spread. Only it is measured not in currency, but in points. Why? We'll tell you further.
How the spread is measured - convert points into money
What is a clause? This is the change in the last digit of the quote. Note! There are 2 calculation systems: according to the old one, the quote can have 2 or 4 decimal places. For example, 108.57 for USD/JPY and 1.1987 for EUR/USD. And according to the new one - 3 or 5 digits (108.578 and 1.19878, respectively). A point is a change in the 2nd or 4th digit after the decimal point. (Fig.3)
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The size of the spread depends on the amount you are trading. The higher it is, the more deductions to the broker. Depending on the transaction amount, 1 spread point can be equal to $1, or maybe $1,000!
For example, when trading 1 lot, each point (that is, 0.0001) will be multiplied by 100,000. When entering the market with 2 lots - by 200,000 and so on. Therefore, if you calculate the spread incorrectly, you can lose your entire deposit. More on this below in the Leverage section.
Calculating the true size of the spread is difficult. After all, it depends on several conditions:
- Spread type (fixed or floating). The fixed spread is equal to the number of points pre-agreed in the trader’s agreement with the broker. Floating – can change every second. The first one is better suited for trading on news and at night. And the second is for long-term transactions (for a week, a month, etc.).
- Lot size. A lot is a portion that you trade. Standard 1 lot = $100,000 (99 of which are given by the broker under the terms of leverage 1:100). But no one prohibits the “diet regime”! You can trade 0.1 and even 0.01 lots (10,000 and 1,000, respectively).
Attention! The floating spread “for convenience” is indicated by 0,000 points. But this does not mean that commissions are not charged on the pair! This is a signal to clarify the current size further.
Leverage and spread calculation
And now about leverage. Entering Forex with a hundred bucks is an unrealistic idea. After all, central banks and corporations will not buy trillions bit by bit! The minimum transaction amount here is $100,000.
But what if 99% of traders do not have such free money? In this case, a broker – an intermediary company – is ready to lend its shoulder. And this is called “leverage” - credit. Its size can be 1:1, 1:10, 1:50 and even 1:500.
What does it mean? The broker adds the missing amount to your deposit to reach the required 100,000. And the number after the colon indicates how much the trader himself should invest.
For example, 1:100 means 1 lot (100,000) divided by 100. That is, you open a trade by investing $1,000 (100,000/100= 1,000). The broker adds another $99,000. You can already trade with this amount!
But don’t worry, out of the 99 thousand credit you won’t lose more than your deposit. As soon as the loss approaches the amount of the initial investment, Stop Out will work. And the broker will take his money. Got it? Now let's get back to calculating the spread.
Example: EUR/USD transaction (rate 1.1920), 1 lot (remember that this is $100,000). 1 point according to the terms of the transaction will be equal to: ($100,000*0.0001)/1.1920 = $8.4.
Where did the number 0.0001 come from? This designates 1 point in a four-digit quote (4 digits after the decimal point). 0.0001 – price movement step on the chart. For example, 1.1920 – 1.1921 – 1.1922, etc. Each time the amount changes by exactly 0.0001.
The spread for the euro/dollar pair at Forex brokers is 0.5–3 points. This is stated in the Contract Specifications sections on company websites. We multiply this number by $8.4 (the cost of a pip in our trade) and get $4.2–25.2.
Second example: USD/JPY (dollar/yen), also 1 lot, but at the rate of 110.65. 1 point here would be equal to ($100,000*0.01)/110.66 = $9. 1 point is indicated by the number 0.01, since the quote has 2, not 4 decimal places. The USD/JPY pair has a spread of 2–4 points. These are the numbers you will find in broker documents approved by the exchange. In our case, it’s $18–36.
You can compare spread sizes in points for different brokers using the following table.
Comparison of spread sizes for TOP brokers in points
| Broker | Spread on EUR/USD | Spread on GBP/USD | Spread on USD/JPY | Spread on USD/RUB | Spread on silver XAG/USD | Spread on gold XAU/USD |
| Alpari* | 0,8 – 1,3 | 1,3 – 2 | 1,2 – 1,4 | 18 – 19 | 22 – 25 | 26 – 32 |
| Teletrade** | 1,5 | 1,6 | 1,7 | 40 | 5 | 40 |
| RoboForex*** | 2 | 3 | 3 | 40 | 3 | 100 |
| Forex4you | 2 | 3 | 2 | – | 5 | 100 |
| InstaForex | 3 | 3 | 3 | 40 | 40 | 60 |
| FxPRO | 0,6 – 1,4 | 0,9 – 2 | 0,6 – 1,6 | 40 | 3 | 30 |
| FreshForex | 2 | 3 | 2 | – | – | – |
– the spread size is not specified in the Contract Specifications;
* floating spread during the European session (10:00 – 17:00 Moscow time);
** floating spread, minimum value indicated;
*** fixed spread on a cent account.
Note! The floating spread can change significantly on the news and at night (increase by 10 - 15 times).
Insignificant amounts, you say? Yes, for high-value assets (those that are bought and sold well) it can be ignored. But there are only about 10 such assets! You will find their complete list below. And now it’s time for the third truth.
Liquidity comes first
What is liquidity? This is the ability of a product to sell and buy well.
Let's take an example from life:
Which car do you think will be more liquid on the secondary market, Hyundai Solaris or Porsche Cayenne? Answer: Solaris. Let's look at the process of selling both cars through the eyes of the seller. There are more Korean cars on the market than German ones. The price of a Hyundai is much lower, which means there will be an order of magnitude more buyers for this brand. In other words, if you had both brands and decided to sell them, then it would be easier for you to find a buyer for Solaris at the right price. Cayenne will be sold for a long time at the price you need. And to sell it faster, you will have to greatly reduce the price, which will be unprofitable.
Now let's look at the same example, but through the eyes of the buyer. Let's say you have 500,000 rubles. for a used Solaris for his wife and 2 million rubles. for a used Caen for your loved one. There will be 100 Solaris at this price, of which it will be easier for you to choose a car that is not damaged and technically sound. But there will be about 20 Caen at this price, but upon closer examination, many of them will disappear, since they will either be broken, or repairs will require considerable investment, in other words, it will be much more difficult to find an unkilled Caen.
In the Forex market, the equivalent of Solaris is the euro/dollar pair. Every 3rd trader in the world (37%) trades this asset. This means that it has high liquidity and brings regular income to the broker. Therefore, the spread here is minimal.
Unlike the USD/ZAR pair, which in Forex is the equivalent of Caen (dollar/South African rand). Have you heard of the rand before? Now imagine how often they buy it, even if the name of the currency doesn’t tell you anything. It is clear why the spread here is 80–250 points (taking into account the low exchange rate, this is $60–190 with a volume of 1 lot). However, liquidity depends not only on the type of asset! (Fig.4)
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Influential factors include time of day, holidays and news releases. Let's remember the Swiss franc, which collapsed during the New Year holidays! And let's talk about how the spread changes in different periods.
How to protect your deposit from spread jumps - 2 “golden rules”
Spread (even fixed) tends to expand. Your agreement with the broker always states that in cases of force majeure it may increase. This is exactly what happened to the Swiss franc in January 2015 due to the National Bank’s decision to stop cash injections to support the currency. Then the spread widened from 3 to 300 points in 1 hour and traders suffered enormous losses due to the execution of Stop Out.
And with a floating spread, jumps occur 90% more often than with a fixed spread. The gap between bid and ask widens:
- at night up to +50 points (especially from 21:00 to 00:00, until the Tokyo Stock Exchange is open);
- on holidays (liquidity drops due to the small number of players on the exchange);
- when important news is released (the ask price rises sharply, but the bid remains in place, or vice versa).
What follows from this?
Rule #1: If you want to win by using a lower floating spread, close trades before important news comes out. Here are some examples of such important news:
- Nonfarm every last Friday of the month,
- speeches by heads of central banks;
- presidential election results,
- decisions on joining/leaving the EU, etc.
Rule #2: always check the current spread. This can be done on the broker’s website or by installing a program that displays this parameter in the MetaTrader window.
The following video will help you consolidate your knowledge.
Spread or commission - 3 assets on which you can get rich or lose everything
Have you heard of zero spread accounts? Tempting stuff! Up close, everything turns out to be not so rosy, because the 0 spread points are compensated by the commission. And you pay the same amount, only it is called differently. But there are assets for which the commission and spread levels are strikingly different (you can save up to 50%):
- USD/CAD (Canadian dollar): on accounts with zero spread the commission is 2 points, and on traditional ones the spread is 4.
- XAG/USD (silver). This is the opposite option, when on accounts with zero spread the commission is 2 times higher than the traditional spread. Accordingly, the commission is 10 points versus 5 points of the spread.
- BTC/RUB (bitcoin/ruble): commission – 0.1%, spread – 0.8%.
In what cases is commission also more profitable than spread?
- If a trader trades pending orders. That is, it sets a condition to automatically open a deal when the price reaches a certain level. In this case, spread may cause the order to fail. For example, news is expected on the UK's exit from the EU. The trader assumes that the pound will fall against this background. But he knows that at such moments the servers are overloaded, and it is almost impossible to open an order. Or is at work, away from the computer. The way out of the situation is to trade on GBP/USD. According to it, if the price falls below 1.3398, a Sell order is opened. But there is still a spread of 8 points! And in fact, the trade will not open until GBP/USD reaches 1.3390. But the quote may not reach this level.
- Pips traders (scalpers) also prefer commissions. After all, if a trader receives 3–5 points, it is simply not profitable for him to give 4 for a spread! Whereas the commission will be equal to 1 point.
- When trading intraday (when orders are not left overnight). Due to the spread, the price often does not reach the Take Profit or knocks down the Stop Loss. After all, this is a kind of “trailer” that the deal pulls behind it. But with the commission there is no such problem.
Dangerous and safe transactions - how spread can “eat” your deposit
In early 2016, Chris Davison conducted a formal study on the profitability of Forex trading. According to its results, only 30% of traders regularly earn money. And what an interesting coincidence! Only 30% of respondents check the spread size before opening a trade. Maybe there is a connection between these numbers?
TOP 10 assets with low spread
There are about 10 assets with a low spread size (up to 5 points). This:
- AUD/USD – Australian dollar (“Audi”) against the US dollar;
- GBP/USD – British pound to dollar;
- EUR/CHF – euro/Swiss franc (“chief”);
- EUR/GBP – Euro/English pound sterling;
- EUR/JPY – euro/Japanese yen;
- EUR/USD – euro/US dollar;
- NZD/USD – New Zealand dollar (“kiwi”)/US dollar;
- USD/CAD – US dollar/Canadian dollar;
- USD/CHF – dollar/Swiss franc;
- USD/JPY – dollar/yen;
- XAG/USD – silver/dollar.
Usually, these tools are enough to conduct profitable trading. But there are times when there is a reason to trade other assets!
Where can you get a $200 spread?
High spread rates are usually set for exotic currency pairs. As well as gold, corporate shares and cross pairs (without US dollar).
Let's take gold as an example. Considering its growth by 8,500 points from August to September 2017, you can invest money in a purchase. But only if your deposit can withstand large drawdowns. After all, having opened a deal, you will immediately find yourself in the red from 18 to 80 points! This is exactly how much the spread is for different brokers. The slightest rollback, and Stop Loss or Stop Out (lack of funds in the account) takes away your savings. (Fig.5)
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Other assets with high spreads (10 points or more):
- AUD/NZD – “audi”/“kiwi” (Australian dollar/New Zealand dollar);
- GBP/AUD – British pound/Australian dollar;
- GBP/CAD – pound/Canadian dollar;
- GBP/CHF – pound/chief;
- GBP/NZD – pound/New Zealand dollar (“kiwi”);
- EUR/AUD – euro/Australian dollar (“audi”);
- EUR/NZD – euro/kiwi;
- EUR/PLN – euro/Polish zloty;
- NZD/CAD – “kiwi”/Canadian dollar;
- NZD/CHF – “kiwi”/Swiss franc (“chief”);
- USD/MXN – US dollar/Mexican peso;
- USD/PLN – US dollar/Polish zloty;
- USD/RUB – US dollar/Russian ruble;
- USD/ZAR – US dollar/South African rand.
Stop Loss and Take Profit - how to set the levels correctly
Spread affects the execution of Take Profit and Stop Loss. But before we figure out how, let's understand these concepts. (Figure 6)
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Take Profit – an order to close a transaction upon receipt of a certain profit. Why is it needed? The price movement on the chart resembles steps. She cannot go in one direction all the time and jumps up and down, forming a corridor. The boundaries of this corridor are called support and resistance lines. The quote for them goes out very rarely and immediately comes back.
Therefore, the trader always places Take Profit in front of these lines. This is necessary to take profits before the price pulls back. How does the spread affect order execution?
It prevents the order from being closed at the specified price, automatically delaying execution by several points. As a result, the chart jumps onto the resistance/support line and reverses. And the trader is left with nothing!
A similar situation is with Stop Loss is an order to close a trade with minimal losses. Only here execution occurs before the price reaches the line you set. Again, by several points equal to the spread size.
How to deal with this? Set the spread value when calculating Take Profit and Stop Loss. That is, set Stop Loss a little further, and Take Profit closer.
How spread affects trading strategy
Spread does not affect the trading strategy if it is tied to long-term transactions (weeks and months). Indeed, in this case the price goes up to 10,000 points. Against their background, the same 250 points of the spread are lost without causing damage to the deposit.
Conversely, this type of deduction can reduce the profitability of short-term trading to zero. It knocks down closely spaced Stop Loss, which is typical for scalping. It prevents you from making money on news and eats up your profits from night trading.
Therefore, scalpers, as well as traders who trade on the night shift, need to search for a long time for a broker with suitable conditions for the assets of interest. And carefully check the current spread values.
Rebate services - how to return up to 90% of the spread
The spread on Forex is one of those pitfalls that have caused more than one thousand deposits to crash. But it turns out you can also make money on it! How? By registering in Rebate services.
These are Internet companies that are ready to return to the trader part of the funds he spent on spread. Brokers themselves offer a similar service, but the percentage there is much lower (about 15%).
Why charge the spread first and then give it away? This is a multi-move game, like in chess. The broker takes a commission from the trader. Then he enters into a partnership agreement with a rebate service to attract new clients for money. Next, the Rebate service advertises its services, attracting people to the broker’s company, and receives its reward. He pays part of it as interest on the spread. Everyone is happy!
conclusions
Let's summarize:
- Spread is the difference between the purchase price and the sale price, or in other words, the difference on the chart between the Ask and Bid lines.
- If the Ask price is not reflected on the chart, then correct it in the terminal settings
- The spread is measured in points.
- To determine the spread, 2 calculation systems are used.
- The size of the spread depends on the amount you are trading. The higher it is, the more deductions to the broker.
- The spread can be fixed or floating.
- The minimum spread usually occurs for highly liquid assets, such as the euro/dollar pair.
- High spread rates are usually set for exotic currency pairs.
- The size of the spread is also affected by the time of day, holidays and news releases.
- To protect yourself from spread spikes, always close trades before important news releases and regularly check the spread is up to date.
- The spread can be zero, but this does not always mean a benefit for the trader, because in this case the broker's commission comes into play.
- According to the study, only 30% of traders check the spread size before opening a trade.
- You can return part of the spread if you use rebate services.
- Spread influences the investor's trading strategy if it is based on scalping, cross pairs, gold or exotics.
- It reduces the likelihood of pending orders and Take Profit being triggered. And on the contrary, it increases the likelihood of hitting Stop Loss. Therefore, when setting these levels, include the spread size in them.
We hope our tips will help you avoid losses in the Forex market and make your trading strategy even more profitable. Like and don't forget to subscribe to new articles.
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Article rating:
0 points (0 visitors voted)If you are new to the Forex market, but want to learn how to trade profitably, then the question What is a Forex spread? should interest you first of all. Let's look at the concept of the word spread in Forex, as they say, “bone by bone”, and find out what a spread is, what types of spreads there are, what affects the size of the spread and “how” does it relate to the trading strategies of traders?
What is a Forex spread?
So, the meaning of the word Spread from English is translated as - scope, difference. Knowing the meaning of the word Spread, it becomes intuitively clear that Forex spread is the difference between the purchase price and the sale price (ASK and BID) of a currency pair. The spread determines - the larger it is, the less market liquidity. For ease of perception, this indicator is indicated in points, which helps to compare trading conditions with competing brokers. For example, if the current EUR/USD quote is 1.3800/1.3804, then the spread for will be 4 points (1.3804 - 1.3800), which in dollar equivalent will be equal to $4. For a cent account, the spread will also be 4 points or 40 cents.
Immediately after the trader, its value will be negative, and the loss will be equal to the size of the spread. So, when buying four standard lots of the EUR/USD currency pair at the rate of 1.3800/1.3804, the initial loss will be $16, that is, the size of the spread multiplied by the cost of one point. The rate must rise by 4 points for the transaction to break even, and even higher for it to make a profit. A spread is analogous to a commission debited from the account when a trade is opened. Thanks to the spread, they make their profit from transactions. To promote financial market liquidity, a maximum spread is set. When this limit is exceeded, trading stops.
Types of spreads on Forex.
There are several types of Forex spreads. Fixed spread remains constant under any market conditions. It is installed by dealing centers for accounts serviced automatically. Many brokers push the spread limits before exiting, because in a volatile market it is impossible to keep them within certain limits.
The most popular now is floating spread. In this case, the difference between the purchase and sale prices varies within a certain range depending on certain conditions. The spread may be minimal - an indicator less than one is no longer uncommon. The floating spread is usually two to five points in a calm market; during periods of sudden movements it can increase to 50 points or more. But its maximum threshold is limited, so when important news is released, the floating spread will not exceed a predetermined value. This spread resembles the conditions of the interbank market. In this case, trading strategies in the strategy tester become impossible and all the benefits of some trading strategies or advisors based on them are negated.
What affects the size of the spread?
The size of the spread is affected by:
- - currency liquidity. The spread is several points, usually within 10, in contrast to exotic cross rates, where the difference between buying and selling can be tens of points;
- - volumes of transactions made. Small volumes due to overhead costs and large volumes due to increased risks are quoted with a large spread;
- - market condition. The spread increases during active transactions on currency pairs, that is, during volatility. As a rule, such situations are observed when affecting Forex. Also, an expansion of the spread is observed with low liquidity, which is inherent in the “night” and “holiday” Forex markets;
- - dealing center client status. By setting low spreads for novice traders, the broker encourages them to trade with this particular DC.
Sometimes the spread depends on the volume of the upcoming transaction, but this usually applies to particularly large transactions. Banks take risks when concluding large transactions, so they are forced to hedge their bets.
Dealing centers and spread.
It would be logical to assume that the development of the foreign exchange market implies a systematic reduction in the spread on Forex, but in reality everything is different. Development, where the agent’s remuneration for the attracted partner is paid in the form of part of the spread, restrains the trend of its decrease.
It is necessary to carefully evaluate the broker's trading conditions. Its choice is important for the trader, since profits begin to accumulate only after the currency pair makes a movement that is greater than the spread. Of course, there are other features of trading, but the spread is one of the most important indicators. Traders who trade frequently can make or lose significant amounts of money depending on the size of the spread.
It goes without saying that it is beneficial for a trader when a broker sets a low spread. And in any case, it is better to open standard accounts with a fixed spread (for example, like the broker Forex4you), rather than with a floating one. This is the only way you will always be confident in the performance of the strategies or advisors you use, and also in the fact that you do not overpay the dealing center depending on the market situation.
Good day, dear traders!
We continue to study the basics of the foreign exchange market and in today’s post we’ll talk about what a spread is on Forex and how it needs to be taken into account in the trading process, namely when you need to add it or subtract the spread value from established orders, etc.
A spread on Forex is, in fact, one of the things that a trader needs in order to master the principles of trading on foreign exchange markets and exchange platforms. The very concept of “spread” is used in this context to denote the difference between the most favorable prices for buying and selling a particular asset at a certain moment.
In fact, the spread in Forex is defined as the difference between the Bid and Ask (sale and purchase prices, respectively) of a certain currency instrument (or).
As a rule, in the foreign exchange market, the spread value is indicated not in monetary units, but in special points (or pips), considering such an expression more convenient for comparison.
To more clearly understand what a spread is, let’s take an example with an exchange office (I think everyone has exchanged currency at some point).
For example, the cost of purchasing one unit of a certain currency (Euro) in an exchanger is 1.45 US dollars, and it is sold for 1.4 dollars. If we consider the size of the spread in money, then it will be 0.05 US dollars (1.45 – 1.4 = 0.05), and is the net profit of the exchanger, i.e. his earnings.
How the spread is charged for long and short positions in MT4
The situation is identical in the Forex market, the spread is the difference between the purchase and sale prices, and goes as a commission to your broker, i.e. this is his income. It does not matter whether the trader makes a profit or a loss, the main thing is that for each open transaction the amount of this commission is charged (this value depends on the type and selected currency pair, more on this below).
Let's take a real example from trading (see picture below).
When we open a new order, we see 2 prices here:
- The price at which we can sell Sell – Bid.
- The price at which we can buy Buy – Ask.
In our case, the spread is 2 points (1.3053 – 1.3051 = 0.0002, with 4-digit quotes).
When a trader opens a Buy transaction, the broker charges the spread size at the time of its opening. In all cases of opening a new buy position on any currency pair, the trader sees a negative result (with a minus) on his trading account.
That is, by opening a new Buy position, he automatically loses by the amount of the spread.
If we consider the above example in the figure, then to achieve a zero result, the price must travel the distance in the direction of the open position by exactly the amount of the spread, in our case, several pips (depending on the currency pair).
Accordingly, in order for the trader to make a profit from this open position, the price level must be higher than the specified spread value (+ several points) and higher than the level of the open position.
This must be taken into account to correctly set stop loss and take profit orders when buying, that is, they must be increased by the amount of the spread from their current level.
When opening a Sell transaction, the broker takes a spread during the closing of this transaction. Please note that the Bid sell price is the same as the price on the chart, and when closing a sell trade, the Ask price will be used.
In this case, when selling, the price may not reach the established protective order by the amount of the spread and thus close the transaction. For example, the stop loss level for selling is at 1.3200, then the price when approaching it will close the deal at 1.3197 with a spread of 3 points.
For the take profit level when selling, the price will close the position only after passing the profit taking level by a spread amount below its current level.
Accordingly, for the correct placement of stop loss and take profit orders when selling, their levels must also be increased by the amount of the spread from their current level, only now in the opposite direction compared to the purchase.
To summarize the above, the main thing you need to remember is that during the trading process, when buying, the spread on Forex is charged at the time of opening positions, when selling - at the time of closing these positions.
Types of spread on Forex
Regarding the size of the spread, we can say that it is a dynamic value. It is significantly influenced by various factors, such as: the liquidity of the foreign exchange instrument, the volume of the transaction being carried out with the selected broker and the state of the Forex currency market itself.
There are several types of spreads in the Forex market:
- Fixed spread - that is, the size remains the same, regardless of the situation in the Forex market. This type is usually installed by brokerage companies for micro and mini accounts serviced automatically. By the way, among the popular intermediaries in the Forex market with a fixed spread, the broker should be noted Alpari. By the way, this broker has a minimum size. For popular currency pairs, a spread of 1.5 points for the EUR/USD pair, 2.5 points for the GBP/USD pair and 1.6 points for the EUR/GBP pair is removed here. InstaForex, on the contrary, has a fairly high fixed spread - 3 points for the currencies EUR/USD, GBP/USD and EUR/GBP.
- Fixed spread with extension - the calculation option implies that its value may change depending on the state of the market at a certain moment. That is, if it is equal to three points, then after the release of important financial news it can expand to five points.
- A floating spread on Forex is usually 2 points when the situation on the foreign exchange market is stable. At the same time, its size can grow to 45-50 points during sharp market fluctuations. This type is more common among EC brokers. In addition, floating spread is also often used by banks.
Forex spreads can vary in size, depending on certain factors. For example, the liquidity of currency pairs: for the main pairs on Forex, the spread can be only a couple of pips, for more exotic ones () - tens. Also affects the size of the spread and the volume of transactions - a wider spread is charged on small and very large transactions. In addition, the current market situation has a huge impact on the volume of this indicator.
To simplify work in the Forex market, traders can install a special spread indicator to their . A good example of this is the Spread MetaTrader forex indicator, which makes it possible to show its actual (current) size and is displayed on the chart of the trading terminal.
You can download the Spread MetaTrader indicator at link
So, fellow traders, now you know what a spread is on Forex, how it is charged by a broker when trading and how to correctly take it into account when opening positions and protective orders.
In the following posts on the Forex blog, there will be a lot more useful information about important concepts of the Forex market that you must take into account and know in the trading process. So definitely stay tuned for new updates.
Best regards, Alexander Siver
Hello comrades! :-) I receive emails with questions from readers of this blog, I try to answer if I can help in any way. Here is the text of one of these letters, published with the permission of the author:
Hello, Ivan!
I am a beginner trader, my name is Mikhail. I just recently opened my first real account, I’m trying to trade according to the strategy.
But there is a problem, it seems to me that my broker is deceiving me, because after opening any transaction, it immediately becomes unprofitable! I specifically checked this, as soon as I open a trade, there is already a small minus in the “profit” column of the MT4 terminal! Moreover, the price did not have time to make even the slightest movement...
Tell me, please, what to do? Maybe I'm doing something wrong? Or is it better to immediately run away from such brokers?
Who among the beginners has not had similar questions and unfounded suspicions about brokers (precisely unfounded, because the company has nothing to do with it!)? This is understandable, every trade immediately becomes unprofitable - try to make money! It's all about the spread, which is often not taken into account by novice traders.
What is a spread?
What is a spread in Forex? Spread is the difference between the sale price and the purchase price. That is, at a certain point in time, the purchase will take place at a slightly higher price than the sale. See the picture below. The purchase price is called Ask. The selling price is called Bid.
It is thanks to this difference in prices that every transaction immediately becomes unprofitable after opening. Because you bought at the Ask price (higher), and will sell at the Bid price (lower). This is taken into account in the MT4 terminal, and a small loss is automatically displayed in the “profit” column, which is equal to the size of the spread. This is exactly how I answered Mikhail. :-)
Why can't I see the spread size?
Because the Ask price is not displayed by default in the terminal settings, only the Bid is shown. If you have MetaTrader4, then fixing this is as easy as shelling pears. You need to right-click on the chart and select “properties”:
In the window that opens, check the box next to “show Ask line”:
Now the chart will display 2 lines: the upper one (Ask purchase price) and the lower one (Bid selling price).
Examples of transactions.
Example 1. Buy trade. A purchase transaction is made at the Ask price, which is a higher price. Even if its display is disabled in your terminal, the order will still open at the Ask price (in the picture below at 1.03504). But you will close the order at a different price - Bid.
Example 2. Sell transaction. It is concluded at the Bid price (in the figure below at 1.03485), this is a lower price. She always shows up. When a sell transaction is closed, the same volume is repurchased at the Ask price.
Example 3. Let me give you another question from a reader:
Good afternoon, Ivan!
I read your articles, thank you for your creativity! :-)
I’m interested in your opinion on one issue; you may have encountered such a situation. I started trading using a new strategy, I noticed that the price often reaches the set take profit, but it is not executed! Sometimes the price goes beyond this level, but the order still does not close, you have to close it manually...
Don't know what could be the matter?
It's all about the spread again. Of course, it’s unpleasant when the price reaches your profit, but it is not fulfilled. But let's look at an example of why this can happen!
Let's assume you opened a sell trade and set your take profit just below the current price. When the price reaches this level, the transaction should be closed, that is, a purchase will occur (since we initially sold).
Now look at the picture:
You can see that the Bid price has indeed dropped below the Take Profit level, but notice that the Ask price is higher. Since our take profit is set to buy, it will only work when it touches the upper price (Ask).
Because of such nuances, it may seem that the order is not triggered (especially when the Ask display is turned off), in fact, the price simply did not reach it.
How does a forex spread affect results?
As you understood above, a spread is a small commission that the broker takes for each transaction. On the one hand - a trifle, the difference is very small! But if you calculate more carefully, the numbers will be quite impressive. A little bit in each transaction, as a result, tens of percent of the deposit accumulate! This is not a joke, for example, in 100 trades I lose about 30% of my deposit on the spread! This is quite an impressive amount; in order to be in the final profit, you need to earn more than this. But losses on the spread depend on many factors: the broker (how to choose with minimal costs), trading time, so you will have completely different numbers.
I conducted my own research on this topic. It turned out that a commission of 0.1% turned a profitable strategy into a non-working one! Over 4 years of testing, the commission ate up almost 1200% of the profit! I converted all the results into graphs, you can evaluate them.
What determines the size of the spread in Forex?
The spread can be fixed, floating or floating with a built-in commission.
Fixed. Very popular with forex brokers, especially for account types that are aimed at novice traders. The spread size is constant all the time, for example, 3 points. Novice traders clearly know what commission they will pay even before opening a transaction. In addition, you can test trading strategies on historical data with great accuracy. But there is a significant drawback - the size of the spread is very high (which does not bother new speculators one bit! :-)).
Floating. This type of spread is typical for ECN accounts, transactions from which are entered into the interbank market. The difference between the purchase and sale prices changes over time, for example, it can be minimal while waiting for news and expand sharply at the time of its release. In the long term, trading on such conditions is more profitable than with a fixed spread.
Floating with a built-in commission. Exactly the same as described in the paragraph above, but there is a minimum value, a fixed commission, less than which the spread cannot be.
The Forex market remains unregulated in our country, so pricing is far from transparent (as we would like!). Each broker can set its own commission, for example, for EUR/USD the spread is 3 points, and for 10 times less (!) - from 0.3 points.
Complete dictionary of Forex terms.
This is an indispensable thing for novice traders! I remember reading various articles myself and not understanding half of them at all :). What is a spread, what is it swap, some kind margin, leverage, etc. In fact, these are simple things that you can read about once and not worry about. You can get a dictionary of Forex terms absolutely free from the following link:
| OPEN DICTIONARY OF FOREX TERMS |
Well, that's it, now it's time to finish. A private trader was with you, we discussed what a spread is in Forex. I invite you to subscribe to blog updates by email in the form below, so you will be the first to know about the most interesting things. Or add yourself on social networks, where I announce posts. I wish you success bye!
P.S. Video about the spread, everything is told in your fingers!
