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How Much the Spread Affects Forex Trading?

LEO

Oct 25, 2021 14:08

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What is the spread?


In forex trading, the spread is the difference between the bid (sell) price and the ask (buy) price of a currency pair. 


The spread is calculated using the last large numbers of the buy and sell price, within a price quote.


The tighter the spread, the better value you get as a trader.


The smallest unit of most foreign exchange quotations is five decimal places, such as 0.00015 means 1.5 points.


Take EUR/USD as an example:


The buying price is 1.21210, the selling price is 1.21217, and there is a 0.7 point difference between the buying and selling prices.


If you want to buy EUR at this time, the spread is 0.7 points, which is a loss value of $-7,(0.7*$10=$7).


Most forex currency pairs are traded without commission, but the spread is one cost that applies to any trade that you place.


The size of the spread can be influenced by different factors, such as which currency pair you are trading and how volatile it is, the size of your trade, and which provider you are using.


Factors that can influence the forex spread include market volatility, which can cause fluctuation. Major economic indicators, for example, can cause a currency pair to strengthen or weaken – thus affecting the spread. If the market is volatile, currency pairs can incur gapping, or the currency pair becomes less liquid, so the spread will widen.


During the major forex market sessions, such as in London, New York, and Sydney, there are likely to be lower spreads. In particular, when there is an overlap, such as when the London session is ending and the New York session is beginning, the spread can be narrower still. The spread is also influenced by the general supply and demand of currencies; if there is a high demand for the euro, the value will increase.


There are two types of spread in the market: fixed spread and floating spread.


Fixed Spread VS. Floating Spread


Fixed spread does not change depending on time or general market fluctuations and volatility.


Floating spread on Forex and CFD markets is a constantly changing value between Ask and Bid prices. Floating spread is a complete market phenomenon.


In the case of high liquidity and high volatility, the spread may become tighter, vice versa. 


Different brokers have different spreads


Different varieties and different brokers have different spreads. 


Take EUR/USD as an example, June 17, 9:45 (GMT+8)


eToro


The buying price is 1.20001, the selling price is 1.19991, the difference is 0.00010, the spread is 1 and the cost is 1*$10=$10.


Plus500


The buying price is 1.19987, the selling price is 1.19979, the difference is 0.00008, the spread is 0.8 and the cost is 0.8*$10=$8.


FBS


The buying price is 1.19990, the selling price is 1.19979, the difference is 0.00011, the spread is 1.1 and the cost is 1.1*$10=$11.


Our platform


The buying price is 1.20005, the selling price is 1.19999, the difference is 0.00006, the spread is 0.6 and the cost is 0.6*$10=$6.


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Spreads have a great impact on forex trading


Different brokers have different spreads and different costs. The difference can be seen when the transaction volume is large.


Taking EUR/USD as an example, to buy 0.1 lot, the cost on the eToro platform is $1; the cost on the Plus500 platform is $0.8; the cost on the FBS is $1.1, and the cost on our platform is $0.6.


Taking EUR/USD as an example, to buy 2 lots, the cost on the eToro platform is $20; the cost on the Plus500 platform is $16; the cost on the FBS is $22, and the cost on our platform is $12.


Taking EUR/USD as an example, to buy 20 lots, the cost on the eToro platform is $200; the cost on the Plus500 platform is $160; the cost on the FBS is $220, and the cost on our platform is $120.


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We offer competitive spreads on a range of currency pairs.


It can be seen that tighter spreads are low-cost for short-term investors who frequently invest.


It is better to choose some trading products with low spreads to practice for new investors who do not have a lot of investment costs. Such as EUR/USD, the spread is low and the volatility is not large.


The GBP/USD spread is larger, the volatility is also greater, the transaction risk is also greater, but the return is also greater.

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