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
also read
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