Spread explained in depth will help understand better about the market and how to trade therein. In the market, one of the most common terms that a trader is likely to come across is spread. As a beginner in this field, it is vital to understand the definition of this term in relation to trading.
WHAT IS FOREX SPREAD?
In terms, spread refers to the difference between buying and selling prices for a pair. The prices are set and their values are referred to as bid. In other words, spreads are prices offered by brokers to buy and sell to traders. In simpler words, the spread is the amount of percentage in point between ‘bid prices’ and ‘ask prices’ and this is what use to make money in trade. For example, they would offer lower bid price than ask price and in return make money. If the bid/ask prices for Euro/US dollar is 2.0412 and 2.0416, this means that the pair has 4-percentage in the point spread. An immediate liquidation of a trade at the above exchange rate would probably record a loss. It is advisable that traders consider close spreads as it is easy to make a profit using them.
TYPES OF FOREX SPREADS
There are varieties of spreads that a trader should know as some of them are discussed below:
- FIXED SPREADS
These spreads are mainly set by dealing companies hence do not depend on the market condition in order to make a profit. Here, there is no difference between the ‘ask price’ and ‘bid price’
- FIXED SPREADS WITH AN EXTENSION
The market condition has influence over this type of spread. A part of the spread is determined prior and the another part is adjusted depending on the current situation of the market.
- VARIABLE SPREAD
The fluctuation is normally low if the market is inactive and as the market becomes volatile, it widens even up to 40-50 percentage in point at times. Traders cannot predict a trade through this spread even though it’s close to real market. This, therefore, makes it difficult for traders to create a good strategy.
BENEFITS OF FOREX SPREADS
It is beyond doubts that using fx spreads is quite beneficial as they help in transferring the risk that might come with fx. Following the fact that traders hedge every position, they cannot be affected by changes in prices as they are exposed to the spread between less volatile positions. Moreover, fx spreads do not need traders’ attention as they are of intermediate-term duration.
In conclusion, it is evident that traders need to know a lot about fx spreads. Trading in spreads might not be easy without its proper knowledge and understanding. This, therefore, insinuates that it’s important to make use of the above-discussed ideas. Moreover, it is vital to consult with an experienced and knowledgeable broker who can help you with trading as well as expert trading tips.