Knowing what goes into the forex spread can help you make informed trades. Learn how to understand the forex spread so you can make profitable trades.
In this article, we’ll explain how the forex spread affects your trading and why it is necessary. We’ll also share some tips for reducing the impact of the forex spread on your trading profits.
How Forex Spread Affects Your Trading
A forex spread is a difference between the actual price of the currency pair and the prices from which you can open a long or short position.
- Ask price: 1.13325
- True price: 1.13320
- Bid price: 1.13315
In the above case, the difference between the bid price of 1.13315 and the ask price of 1.13325 is a total of .00010, making the total forex spread .00010.
So, if you open a long position at the ask price of 1.13325, the real price has to increase from 1.13320 to 1.13325 for you to break even.
Likewise, if you open a short position at the bid price of 1.13315, the real price has to decrease from 1.13320 to 1.13315 for you to break even.
Why Forex Are Spreads Necessary
For example, if you put in a buy order on a pair currently priced at 1.13320, your forex broker has to find someone who will sell the pair at that price.
In the meantime, the forex pair could make rise 1.13320 to 1.13325. This .0005 difference in price becomes a loss for the broker. Since brokers have to make money, they make up for this risk by requiring you to buy at a slightly higher price.
If they find a buyer at the same price, the .0005 difference becomes pure profit. But even if the forex pair moves from 1.13320 to 1.13323 before the broker finds a seller, they’ve still made a profit of .0002.
Forex Spreads & Pairs You’re Trading
The size of a forex spread changes based on two factors:
- The forex broker you’re using
- The liquidity of the specific forex pair.
In forex, liquidity simply means how busy the buying and selling is for a specific forex pair.
The more buyers and sellers a pair has, the faster forex brokers can fulfill orders and reduce their risk. This means they can afford to offer traders a narrower spread for that pair.
For example, the EUR/USD has the highest liquidity of any forex pair. The forex spread for this pair can be as low as .0001 during peak trading periods or .0004 during very slow trading periods.
However, a less liquid pair like the CAD/MXN (Canadian Dollar to Mexican Peso) can have a forex spread ranging from .0010 to .0040 or even as high as .0100.
How to Decrease Your Forex Spread
You can reduce the size of your forex spread by doing two things.
For example, North American pairs (USD/CAD etc.) have lower spreads during the New York Session, while Pacific pairs (JPY/AUD etc.) have lower spread during the Tokyo Session.
Forex signals advisors, like RedHotFX, can also help you time entries so that you’ll recover quickly from the loss caused by a forex spread.
Forex Spread Tips
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