What is spread forex trading
- Spreads are based off the Buy and Sell price of a currency pair.
- Costs are based off of spreads and lot size.
- Spreads are variable and should be referenced from your trading software.
Every market has a spread and so does Forex. It is imperative that new Forex traders become familiar with spreads as this is the primary cost of trading between currencies.
Fixed spread – difference between ASK and BID is kept constant and do not depend on market conditions. Fixed spreads are set by dealing companies for automatically traded accounts.
Variable spread – fluctuates in correlation with market conditions. Generally variable spread is low during times of market inactivity (approximately 1-2 pips), but during volatile market can actually widen to as much as 40-50 pips. This type of spread is closer to real market but brings higher uncertainty to trade and makes creation of effective strategy more difficult.
In general, smaller spreads are better for Forex investors because a smaller movement in exchange rates lets them profit from a trade more easily.
Buy orders are executed at the higher ask price, while sell orders are executed at the lower bid price. This means that if a trader buys and then sells immediately, they will always lose the amount of the spread. Because of this, forex traders generally look for low spreads, since the spread is the equivalent to a tax.
What is commission ?
A commission is similar to the spread in that it is charged to the trader on every trade placed. The trade must then attain profit in order to cover the cost of the commission.
Fixed fee – using this model, the broker charges a fixed sum regardless of the size and volume of the trade being placed. For example: With a fixed fee, a broker may charge a $1 commission per executed transaction, regardless of the size involve
Relative fee – the most common way for commission to be calculated. The amount a trader is charged is based on trade size; for example, the broker may charge “$x per $million in traded volume”. In other words, the higher the trading volume, the higher the cash value of the commissions being charged.
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