As a broker you are able to manipulate spread in the forex market on your trading platform. Therefore, it’s very important to understand what spreads means. Bellow I will explain it more thoroughly.
A easy way to explain it is: EUR / USD is priced at 1.1500 the broker will offer it for 1.1501 to buy or sell at 1.1499. So, spread is the difference between the bid price and the ask price (buy and sell), in a currency pair such as the EUR / USD. It’s absolutely the easiest way for brokers to get compensated for each transaction the customer makes through their trading platforms.
To understand how the trading price for any currency pair is expressed look at following example:
EUR/USD = 1.1500/1.1502
It is expressed by the combination of the symbols that make up the currency pair as well as the bid and ask price.
BID = the highest amount the trader is willing to buy (purchase price/Demand). When the trader will enter the market and sell the currency pair he will pay a price and this price is called bid.
ASK – This is the selling price (supply), is the minimum price that you are willing to sell for. Is the “opposite to the bid”, is the price of the traders buying the currency and then enter the market.
What is the difference between BID and ASK?
It is the spread that I expressed as pips or point. I this ex the spred = EUR/USD 2 pip or points.
So, what is spreads?
The cost of each transaction performed by the trader (swap and commission is not included). There are brokers that use the market maker and ECN system which allows them to charge a very tight spread but charge commission for every transaction executed. The cost of the spread varies from different brokers. Spread is a basic compensation for the brokers and if third parties are involved as well.
The work of spread
Let’s say that trader Y want to open a buy position in EUR/USD as a price of 1.2001. The broker want to go through with the order as soon as possible so he executes the order at 1.1999, now one pip is made in the execution. Trader X decides to close the buying position and sell it at 1.2010, but to make another pip on the execution the broker executes the order at 1.2011.
Now, the trader has to pay a fee for every execution in above example to be able to trade in the forex market and to obtain profits. The expectation from each trade should be over the spread amount to capitalize on every trade. In each currency pair the cost of spread is different and also the trader should account for those variables in order to make more money than the actual spread cost.
You have to know the spread in the forex market – it’s really important
As mention before the spread is the cost of each transaction that the brokers charges.
ALL investors and traders should have an education and most of all have the possibility of manipulating the spreads on their trading platforms without the consent of their clients, that’s a shortcoming!
It is really important for the trader that the broker is not guilty of any spread manipulation. It has to be a broker with trustable information and god quality of spreads. Have in mind that some brokers are just doing this obtain more profits.
My advice is also to trade with brokers that is regulated by a regulatory body. Because they are strict about the financial products and services and that the clients are getting treated in the way they should.
Mabey you already work with brokers that you know do not engage in any tampering do not forget the importance in the spread, this represent the cost to the trader. If you trade with low spreads it will give you less operating and long-term saving. With higher spreads you as a trader had to generate higher profits because of the spread cost.
Example: if a trader makes many short-term (scalper) trades and have a high spread it could absorbed a big amount of the profit. If you compare this with a long-term trader the spread is a matter of little relevance because the impact is so much less in the result of the trade. (because each trade is generating a certain amount of pips).
How has the best spread?
It’s really important to select the best broker to get the best spread. As I mentioned previous in the text the importance of selecting a trustable broker that has a good reputation without allegations or complaints of fraudulent dealings. Even better if you use a broker that is regulated as well, that gives I high level of security of the handling with your money.
Review our list of trustworthy brokers.