What is a Forex Spread in Trading (Part 1)

Spread is one of the basic terms of forex trading and investing. It should not be an unknown term for you if you want to trade currencies and generally make an investment in the stock market.

In this article we will see :

- What is the Spread in Trading ？

- How to measure the spread on Forex ？

- The best indicator : MetaTrader Spread

- Why the Spread is important for your Trade profitability

Forex spread - Definition

On the stock and the forex market, spread is the difference between purchase and sale price. It is the difference between the bid and ask price.

Once the position is opened, the spread no longer varies because it is already paid.

From an online broker's perspective, spread is one of its main sources of income, along with the commissions and swap fees. A spread can be fixed or variable, most online brokers provide variable spreads.

Example : Spreads at the Broker Admiral Markets

- CAC40 : 0.8 pips

- DAX30 : 0.8 pips

- EUR/USD : 0.8 pips

- SP500 : 0.4 pips

- NQ100 : 0.8 pips

- GOLD : 20 pips

How we can measure the spread in Finance

The difference between the buy and sell price is measured in pips or points. In the currency market, the period is the fourth digit after the decimal point in an exchange rate. Consider our example : the Euro/Dollar (EUR/USD) rate at 1.1234 / 1.1235. The difference between supply and demand is 0.0001. This is the equivalent of saying the spread is one point one to one pip.

The stock market spread is also the difference between the bid and ask price of a security.

The amount of the spread varies for each broker and depending on the volatility and volumes traded on an instrument. The most traded currency pair is the Euro/Dollar (EUR/USD) and generally the lowest spread is found on this pair. The spread can be fixed or variable and it is proportional to the volume placed on the market.

At first, brokers will often collect the spread when the position is opened. Thats why your position is initially negative on the trading platform. This is a very easy way to see how much the brokerage fees are.

Each online broker publishes the typical spreads provided on the Contract Specifications page.

(To be continued...)