What is Forex Spread?

Some newcomers wonder what the term "Forex spread" means. Although this term may seem complex to the average person, it is actually very simple. However, despite its simplicity, it is an important element of Forex trading because profits and losses depend on the spread applied to currency pairs.

The definition

Forex Spread is the difference between the buying price of a currency pair in the market (the question) and the selling price of the pair in the market (bid). For this reason, it is generally called bidding. The price of the question is generally higher than the offer price, resulting in a slight loss for the merchant once the transaction is open, the size of which is determined by the difference imposed by the broker. For this reason, it is important to understand all aspects of Forex trading by looking for brokerage companies offering the lowest possible spread rates.

Examples of spread calculation

EUR / USD SPRED with 4 decimals in quotation: Question price 1.4102, offer price 1.4100, spread of 1.4102 - 1.4100 = 0.0002 or 2 pips.

GBP / JPY spread with 2 decimals in quotation: price of the question 134.17, bid price 134.11, spread 134.17 - 134.11 = 0.06 or 6 points.

EUR / USD difference with 5 decimals in quotation: Ask for the price 1.41023, the asking price 1.41004, spread between 1.41023 - 1.41004 = 0.0019, fraction of 19 pips or 1.9 common points.

USD / JPY spread with 3 decimal places in the listing: Indicative price 86.782, Bid Price 86.770, Spread 86.782 - 86.770 = 0.012 or 12 Fractional points or 1.2 common points.

How to take advantage of your Forex trading knowledge?

You must take into account the cost of dissemination when developing your Forex trading system, keeping in mind that opening the mall position uses the price of the item when opening of the sale at the offer price. For example, if a trading system requires placing a stop loss order at 20 pips and a profit taking level of 50 pips, you will have two ways to do it:

You can add the profit-generating value to the opening level (or deduct it in the case of a sell position) and place breakpoints at the same level (or add them in the case of a short position) . In this way, you keep the result ratios while increasing the probability of reaching stop levels while reducing the likelihood that the price will reach the profit taking level.

Alternatively, after following the steps above, you can deduct the spread from the profit taking and stop the loss (or by adding the spread in the case of the sales positions). This method makes it possible to maintain the possibility of activating stop loss or profit-taking levels, but reduces the profit made when the price reaches the level of profit-taking and increases the loss incurred if the level of profit is exceeded. 'stop.

As is clear from these examples, both methods have their own disadvantages. You will need to test the trading system yourself and correctly apply your knowledge of spread concepts when calculating the profit / potential loss.

 also read

Forex Trading: The Perfect Forex Trading System

Your Guide to Learn Forex Trading System

What is Forex Spread?



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