Average spread in Forex. Compare broker spreads

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:

1. 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.).
2. 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%):

1. USD/CAD (Canadian dollar): on accounts with zero spread the commission is 2 points, and on traditional ones the spread is 4.
2. 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.
3. BTC/RUB (bitcoin/ruble): commission – 0.1%, spread – 0.8%.

In what cases is commission also more profitable than spread?

1. 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.
2. 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.
3. 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):

1. AUD/NZD – “audi”/“kiwi” (Australian dollar/New Zealand dollar);
2. GBP/AUD – British pound/Australian dollar;
3. GBP/CAD – pound/Canadian dollar;
4. GBP/CHF – pound/chief;
5. GBP/NZD – pound/New Zealand dollar (“kiwi”);
6. EUR/AUD – euro/Australian dollar (“audi”);
7. EUR/NZD – euro/kiwi;
8. EUR/PLN – euro/Polish zloty;
9. NZD/CAD – “kiwi”/Canadian dollar;
10. NZD/CHF – “kiwi”/Swiss franc (“chief”);
11. USD/MXN – US dollar/Mexican peso;
12. USD/PLN – US dollar/Polish zloty;
13. USD/RUB – US dollar/Russian ruble;
14. 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.

Video for dessert: Chic log lamp

Spread (from English spread - expansion, stretching) is the difference between the purchase price and sale price of a currency. The spread is measured in points or pips. Why do you need a spread in Forex? It’s simple – it’s a fee to the broker, a commission for the intermediary services provided to the trader between him and the financial market.

When choosing a broker, novice traders should pay attention to the size of the spread that is offered to him. The lower this value, the better for the player. Commission is the main source of income for a broker, along with SWAP, profit from paid courses, strategies and webinars for traders.

The size of the spread depends on the volatility of the market and the financial instrument. On some currency pairs it is lower, for example, on the same euro-dollar, since this financial instrument is very popular among traders due to its high liquidity. On exotic currency pairs, for example, USD/RUB, the spread will be higher, since the demand for this currency is much less.

Every time a trader invests in a trade, the broker makes money on the spread. When purchasing, the intermediary earns at the moment the transaction is opened, since the transaction is opened at a price slightly higher than the market price. When selling - at the time of closing the transaction. Beginners are often perplexed - they opened a trade, but it is already in the red. It was the broker who wrote off the spread amount from the trader's account. The broker, as an intermediary company, makes money in any case - it does not matter whether the trader made a profit or loss.

Types of spread

Modern brokers offer their clients several types of spread, which are selected when opening an account. There are only 3 types of commission:

• Fixed spread – as the name implies, the broker sets for each instrument a fixed commission amount, which will be charged to the client when opening transactions. With a fixed spread, you do not need to constantly monitor the commission; this is the main advantage. The disadvantage of this type of spread is that in short-term transactions it will “eat up” most of the profit. Therefore, a fixed commission is more suitable for medium and long-term trading, where a couple of points do not matter much;
• Floating spread – the commission amount constantly changes depending on the liquidity of the market. With strong, long-term BOs, the size of the floating commission is reduced to minimum values, which is very beneficial for the investor. The disadvantage of a floating spread is that during periods it increases to 20-30 points. This makes trading simply pointless, since the commission will cover the profit received due to price movement;
• Commission per lot - the trader pays a commission depending on the volume of the transaction, for example, $50 from $100,000. A floating spread is added to the lot commission; as a result, the total fee is no different from other types of commissions.

How to choose a dealing center with a favorable spread?

(or brokers) make money through the spread, that is, through margin trading of small clients. If a trader, when choosing a broker, sees that he is offered zero spreads, then it is worth studying the trading conditions in more detail. In financial markets there are often companies that attract clients with zero commissions. But at one point such companies close and disappear along with the traders’ money.

Advice: The determining factor in choosing a broker should be the reputation and reviews of the company (and only last but not least, the spread).

Some companies actually do not charge the investor the difference, but make a profit due to additional commissions, which are not emphasized when replenishing the account. Many brokers reduce the difference to zero, but at the same time set certain restrictions on trading. In other words, the broker will not offend himself, he will take his own. The trader’s task is to find a middle ground between the company’s reputation and the size of the spread.

Advice: If you have not yet decided on a brokerage company, we advise you to choose large companies, such as InstaForex, which have proven themselves in the market.

Where can I see the spread?

Most traders trade Forex through the MetaTrader 4 trading terminal. The spread value can be determined in several ways:

1. On the “Market Watch” tab - next to the names of currency pairs, data on the ASK and BID prices, as well as the spread value, are displayed. If this information is not available, then you need to right-click anywhere on the tab and select Spread.
2. On the “New Order” tab - in the window with data about the new order, all the necessary information about the financial instrument is displayed, including the spread value.

Indicators for determining spread

Metatrader 4 is a fairly flexible investor tool that allows you to implement new technical indicators and trading systems to facilitate chart analysis. Programmers have developed many indicators that independently determine and display the spread value in a convenient form on the chart.

What is a spread? The word “Spread” is translated from English as the difference between prices. In simple terms, a spread in the forex market is the difference between the purchase price (ask) and sale price (bid) of currency pairs. The size of the spread is a criterion of market liquidity; the higher its value, the correspondingly less liquidity. This is actually why the spread is small when trading popular pairs. For example, when opening an order for the euro/dollar pair, we see quotes of 1.2669/1.2672. The spread value for 1 lot is three points (or $30).

When opening any transaction, the trader immediately receives a loss equal to the spread value. For example, if you buy four lots of the euro/dollar pair with a quote of 1.2669/1.2672, then the initial loss will be $120 (3 spread points x 4 lots). For this transaction to cross the break-even point, quotes must change in the direction of the transaction by at least 3 points. Accordingly, to generate income - even more. The spread can be compared to a commission, which is automatically withdrawn when opening trades. For an honest broker, the spread is the main source of income. By the way, on stock exchanges, in order to regulate market liquidity, spread limits are set: if its maximum value is reached, then trading automatically stops.

Types of Spread in Forex

There are two types: fixed and floating. The same broker can provide clients with a choice of any type of spread; This is typically expressed in terms of different types of accounts.

It is characterized by a constant spread regardless of changes in the market. These types of accounts are typically used for trading by robots and advisors. There are also fixed spreads with the possibility of extension (usually on ECN accounts). Before significant news appears, brokers can increase the spread.

The floating spread is the most common. It fluctuates within a certain range under the influence of market conditions, and the broker indicates only the lower limit of this range. As a rule, in a calm market state, the floating spread for popular pairs is within 2-5 points, and when news is released it can reach 50 or more points. Therefore, trading accounts with a floating spread are not profitable to use for trading with robots and advisors, because automatic strategies cannot quickly take into account changes in the spread value.

You can view trading conditions with a floating spread from Alpari (). As you can see, only the minimum value is indicated.

What does the spread size depend on?

The floating spread size depends on:

• Liquidity of currencies. In basic pairs, the spread value does not exceed 10 points, while in exotic pairs (pound/Swedish krona - 55 points) it can reach up to hundreds of points.
• Market conditions. With active trading on currency pairs, the spread will increase. This situation is often associated with the appearance of important messages for the foreign exchange market. Noticeable spread fluctuations are also observed during major market downturns, such as at night or on holidays.
• Broker. Each broker has its own vision of the optimal spread value. So, one company wants to earn more from the spread, another thinks more about customers.

P.S.

It would seem that the development of the Forex market should help reduce the spread, but in reality the opposite happens. Various affiliate programs that provide rewards for attracting new clients are paid through the spread. Each broker strives to interest agents with high rewards, which makes it impossible to reduce the spread.

When choosing a broker, you should pay attention not only to analyzing the reliability of the company, but also to studying trading conditions. It is important to remember that profit on a transaction is obtained after the rate of the currency pair for which the transaction is opened exceeds the spread value. Of course, trading in the foreign exchange market has many other subtleties and nuances, but spread and swap are important indicators when choosing a broker. If you have not yet decided on a broker, then I recommend paying attention to the companies (Alpari and AForex), whose trading conditions I cited in the article. To reinforce the material, I offer a short video on the topic.

Profit to everyone!

The price at which a currency can be purchased (Bid) differs from the price at which the same currency can be sold (Ask). This difference is the commission that the broker receives from each executed transaction, and is referred to as the "spread". By making a profit from the spread, the brokerage company in most cases provides traders with the opportunity to carry out all transactions without any additional payment.

Changing the spread value

There are several factors that can affect the size of the spread. If the market is trading slowly and the trading volume is not so large, then the spread increases. Accordingly, during active trading with large volumes of supply and demand (high liquidity), the spread, on the contrary, narrows. Notable political and economic events also have an impact on the size of the spread. The more stable the state of affairs in political and economic life, the smaller the spread. Finally, and not least important, is the volatility of a currency instrument. If the current volatility of a pair is high, then spreads may widen.

The spread size is a very important parameter of trading conditions and when choosing a broker, this indicator should be given priority attention.

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.