Spreads in Forex, How Do They Work?

 When you are new to the world of trading, you will often hear a number of terms that will often be used as you carry out transactions from day to day. Of course we must understand "language" in a field that we are involved in because that understanding will make our lives easier.

In this article, Finex invites you to dive into a concept, a word that you definitely use and must master in order to maximize your learning towards a successful trading career.

The word is "spread".

What are Spreads?

Spreads in Forex, How Do They Work
In simple terms, the spread is the value of the difference or margin between the buy (ask) and selling (bid) prices of a currency between a trader and a broker. This fee is charged by brokers to traders for the transactions they make, not separately.

This is where the broker gets the profit. Naturally, because when you use the services of a broker to make a profit, then there must be a fee or commission that you must bear.

Do not be easily tempted by a broker who provides a commission-free service, because it is likely that the fees he charges are in the spread. Always study in detail the costs you will incur.

Spread Type

In general, there are two types of forex spreads, namely, fixed spreads and floating spreads. Each spread has its own characteristics.

As the name suggests, the fixed spread stays the same regardless of market conditions - whether volatile or stable - the value you agree with the broker of your choice will not be affected.

For those of you who have a small capital, fixed spread is an attractive option, because the average broker does not set a large number. Another advantage of trading with fixed spreads is that transaction costs are more predictable. Since the numbers are fixed, you already know how much you will be paying when you start trading.

With fixed spreads, you can trade more calmly and can measure potential profit and loss with more certainty because you already know the size of the spread.

On the other hand, floating spreads fluctuate according to the bid and ask prices of a currency pair. Spreads will follow currency supply and demand as well as market volatility. The spread value can be very low, it can start from 0, pips, depending on the pair and related broker.

For example, when you want to buy EUR/USD with a spread of 2 pips, but when you press the 'buy' button, you don't know that the NFP report has just been released and the spread can quickly widen to 15 pips.

Therefore, for those of you who choose floating spreads, make it a habit to always be alert to economic news.

How to Measure Spreads

Spreads in Forex, How Do They Work
At a legal and trusted broker, spreads are measured as pips – the smallest unit of price movement of a currency pair. For most currency pairs, one pip is equal to 0.0001.

For example, for the EUR/USD currency pair if the bid price is 1.5735 and the ask price is 1.5737, then the spread price is 1.5735/37 or 2 pips.

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