Understanding Forex Spreads

Forex spreads is how the brokers make there money. Every market has a spread and the size of the spread is due to the liquidity and transparency in the market. When all traders have access to the same price information at the same time, few are able to get away with wider spreads. Wider spreads will result in a higher asking price and a lower bid price. The problem about this is that you have to pay more when you buy and get less when you sell which makes it more difficult to realize a profit.

For example, if the bid is 1.2635 and ask price is 1.2638, the Bid Ask Spread – the difference between the two – is 3 pips. The tighter the spread is the better things are going to be for you. However tight spreads are only meaningful when they are paired up with good execution. Quality of execution will decide whether you actually receive tight spreads. Some brokers have different spreads for different clients based on their accounts. For example; those clients that have larger accounts or those who make larger trades may receive tighter spreads, while the clients that are referred by an introducing broker might receive wider spreads in order to cover the costs of the referral. Some offer the same spreads to everyone.

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Tags: Forex, Trading