Understanding the role of spreads in forex

Understanding the role of spreads in forex

Every forex investor needs to understand what spreads are in forex and how they affect your trading. When you work with a forex broker, you avail online trading services from them and access to the forex market using their platform. The brokers have to earn somehow to offer you their services, which is where spreads play their role. Forex brokers earn through spreads usually but there are also some who charge commissions, swap fees, or other types of charges. These are called trading charges, and every forex investor must understand how much and what charges they might be paying to the brokers for forex trading.

Spreads are the difference in the buying and selling price offered by your forex broker. Basically, they are the transaction cost for each trade you make. These charges are measured in pips and differ based on various factors such as market volatility, economic conditions, every broker also offers different spreads based on their types (either they are dealing desk brokers or non-dealing desk brokers) and the type of currency pairs you are trading with, the pairs with high liquidity has lower spreads and the pairs with low liquidity has higher spreads.

Since they are the built-in cost involved in the ask/bid price, you need to understand what these terms mean.

Ask Price: It is the price at which you buy the base currency for a buy trade.

Bid Price: It is the price at which you sell the base currency for a sell trade.

Spreads: The difference in these two prices

For instance, a quote for the currency pair USD/EUR is 1.0045/1.0047. In this quote, 1.0045 is the bid price at which you sell, and 1.0047 is the ask price at which you buy. The difference (1.0047 – 1.0045) is 0.0002 or 2 pips which is the spread charged by your broker.

You must be wondering why are you buying at a high price and selling at a lower price because that is the cost of brokers offering you fast and quick transactions. The higher the spreads will be the higher you will be paying and earning fewer profits. This is why you need to understand how spreads affect your trading cost and choose a broker that offers lower spreads.

As we mentioned above about dealing and non-dealing desk brokers, the difference in their spreads is the former provides fixed spreads that do not change even in volatile market conditions and the latter offers variable spreads that change according to market conditions. It is up to a forex investor to choose which type of forex broker they want to work with as both have their own pros and cons.

Hope you understand the importance of spreads in forex trading and have a clear idea about their role in your investing costs. Now you can make sure you work with a trustworthy forex broker that offers the lowest spreads as it affects you in the long run.

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