September 24, 2023

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What Does Spread Mean In Forex & How Can It Help You?

3 min read
Forex Trading

If you are new to forex trading, this question “what does spread mean in forex” will definitely come to your mind. You hear the term used all the time when you’re looking at currency charts or talking with a broker, but what exactly is spread and how can it help you in your trading?

Taken directly from Investopedia, the definition of spread is “the difference between the bid and ask prices of a security.” The asking price is the price at which a market maker or dealer will buy the same security. 

A key fact that you need to remember about currency trading is that, unlike stocks, currencies have no intrinsic value. They have no real value other than their perceived value by those who trade them. The only things that give these pieces of paper any value at all are supply and demand.

Components of Spread

A forex spread has two components:

1) The bid/ask spread, which represents the difference between the highest price (bid) someone is willing to pay for one unit of currency and the lowest price (ask) someone will accept to sell one unit of currency.

2) The transaction cost associated with exchanging currencies. This includes spreads and commissions paid to an intermediary.

Types of Spread

Spread is the difference between the bid price and the asking price for a given currency pair. The spread is based on market conditions, which means it will change depending on supply and demand. While you can’t control the spread, you can use it to your advantage when trading forex.

Tight Spreads

When spreads are tight, that means the difference between the bid and ask prices is also small. When this happens, you’ll have an easier time making a profit because your trade will be filled at a better price than if there was a large spread between the bid and ask prices. One way to take advantage of this is to look for trades with a tight spread and then enter at the market price if none of the bids or ask prices work for you.

Wide Spreads

When spreads are wide, that means the difference between the bid and ask prices is also large. This gives you more room to make profits because you can trade at either side of the market without paying a lot of money in commission fees or having to worry about being filled at less than desirable price points. If you’re only interested in trading with wide spreads, then look for trades where both sides of the market have good liquidity, meaning there’s plenty of interest from both buyers and sellers.

How Does Spread Help You In Forex Trading?

Spread in Forex is a concept that will help you win in the Forex market. It is the spread difference between the bid and asks price of a currency pair. The spread is the difference between the lowest price (the bid) at which somebody is prepared to sell and the highest price (the ask) at which somebody is prepared to buy.

Tight spreads are an advantage to traders because they reduce transaction costs and make it easier to get into and out of positions. For example, on EUR/USD with 2 pips spread, there will be 2 pips difference between buying and selling price. Therefore, if you buy for 1.2750 and sell for 1.2752 you would profit with just 2 pips spread, instead of trading with a much wider spread of let’s say 10 pips.

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