Spread in Forex – Explanation
In this article i will explain what is the Spread in Forex.
When you approach your trading platform, you can see two prices for any given currency pair. One of them is the buying price, which also called Ask, and the second one is the selling price, which is also known as the Bid. The Difference between those two prices (bid and ask) called Spread. We can say that the spread in Forex stands for the difference between what the market offers to take from a trader who wants to buy, and what the market offers to give to a trader who wants to sell.
The spread creates a situation where if you buy an asset and sell it right away you’ll lose money, even if the market’s price haven’t change. That’s because the ask price is always higher than the bid price so you will start your position with a small minus.
You can think of the spread in Forex, as an implied trading cost. For example, let’s say that the EUR/USD currency pair current bid (sell) price is 1.1381 and the ask (buy) price is 1.1379. Then, if you decide to buy it right now you will pay 1.1381 while if you are wishing to sell it you would receive 1.1379.
For you, as a trader, the smaller the Forex spread the better it is. That is, because a smaller price movement is required for you to make profit from a given trade.
For example: Say that the current price of the EUR/USD are: Bid – 1.1380, Ask – 1.1382. If you decide to buy the pair you will do it at the ask price – 1.1382.
When you decide to close the trade you will need to sell it, and that will be on the Bid price. The current Bid price is 1.1380, which means that you start your position with a minus 2 USD. The sell price therefore needs to rise 2 pips so the trade will reach the break even point, and at 3 pips or more in order to be in profit.
Learn what is Pip In Forex.