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At the minimum your forex broker will charge you forex spread as their profit, other forex broker might charge commission and other charges but they earn primary from your trades through the spread. Remember these 3 simple things to better understand forex spread 1. Forex spread is the difference between the bid price and the ask price. Forex brokers regularly charge a variable forex spread but there are some forex brokers that charged a fix amount of spread. To illustrate how to compute the spread compare the bid price and the ask price. Let’s take the euro-usd quote of bid price: 1.2570 and ask price: 1.2567, the spread is 3.0 pips or $3 for every 10k lot size. It is highly recommended to choose a forex broker that charge minimal spread to lower fix forex spread and avoid brokers that charged more than the forex spread like commission and other fees. 2. Forex spread is the primary profit your forex broker earns every time you trade. Here is the example on how your broker earns from the spread you pay every time you trade, if you are buying EUR/USD using the above quote, you will buy it at the buy price of 1.2570 and can only sell it at the sell price of 1.2567 leaving you with a 3 pips loss, this will translate to a 3 pips profit for your forex broker, this assumes that the quote did not change when you open and close the trade the spread can move up or down while your trade is still open. The same works in reverse when you are short selling the currency pair. To illustrate further, let’s say you are short selling euro-usd, using the same quoted price above, you will sell it at the bid price of 1.2570 and assuming the quoted price did not change you can close your short position by buying the euro-usd at the ask price of 1.2567, giving you a loss of the same 3 pips. 3. Forex Spread will be credited to your account the time you close your position or your open trade, either by selling your long position or buying back your short position. For those brokers that charge a fix spread you’ll just have to account for the spread every time you make or close a trade but for those brokers that have a variable spread, you should avoid trading during volatile times like before, during and after a high impact news announcement like the Non-Farm Payroll announcement every first Friday of the month. The spread can run high from 10 to 50 pips and sometimes higher specially during high impact news announcement like the NFP or Non-Farm Payroll every first Friday of the month. Any increase in the forex spread is additional income for your broker while it become additional cost for you. Remember these three basic but vital things about forex spread and it can guide in choosing your trades to ensure you get the most of out of it, avoid paying very high forex spread by not trading during the wild and volatile movement of the market at certain news announcement and choosing to trade on calm market hours. Different brokerage has different spread policy. Click here to see the details. Also, don't forget to check forex trading tips for frequently updated trading tips.
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