Posted by admin on July 29, 2011
Forex trade means exchange of money. The currency is always priced in pairs. When you are trading, you are buying one currency while you are selling another one simultaneously. Once you make the commitment to trade, you have to complete the deal. If you decide to exit the trade in the middle, you will have to either buy or sell the opposite position. This means that you will have to sell Euros and buy US dollars in return.
Spreads are forex traders’ best friends. It does not affect the profitability. Brokers usually do very good business when they have the tightest spreads. It is very complicated to understand the spread in forex spot market. The spread is the difference between the bid and the ask price. The quote will be given to you in pips. The “bid” is the price that you can sell the currency at. The “ask” is the price you can buy currency at. A pip is the smallest unit by which a cross price quote changes. For example; if the quote you receive between EUR/USD is 1.2222/4, then the spread equals 2 pips. If the quote is 1.22225/40, then the spread is going to equal 1.5 pips. Spreads are important because the affect the ability to make a return on your investment.
Spreads are the commission base for all brokers. Most of the brokers make their money with the help of best forex spreads. Wider spreads result in large broker commissions. The wider the spread is, it results higher ask price and lower bid price. The consequences of this formula is that a trader will end up paying more when you buy, and less when you sell. As a result, it will lower the profit potential. A broker that has a tighter spread will always get the maximum priority in this business.
Just because a broker has a tight spread does not automatically mean that you will turn a profit. You also need to have a proven trading strategy and proper execution. If your execution is poor, it will be tough to determine that the broker you are using has a wide or tight spread. A tight spread that is executed properly will produce the profit as per the expectations.
In Forex trading, your main priority is to buy low and sell high. Therefore, you don’t want to limit your dealings with a broker that has a wider spread, because it means lower profit earning abilities. A half-pip lower spreads does not sound like much. However, it can easily mean the difference between making a profit and losing your shirt. A good example is when your monitor shows a tight spread, but your trade comes in a few pips higher.
Forex trading does not follow the conventional trading floor. On the inter bank market, the larger the ticket size, the larger is the spread. This is not automatically the same for Forex trading.