You have two ways of minimizing the cost of these spreads:. Trade only during the most favorable trading hours , when many buyers and sellers are in the market. As the number of buyers and sellers for a given currency pair increases, competition and demand for the business increase, and market makers often narrow their spreads to capture it. Avoid buying or selling thinly traded currencies. If you trade a thinly traded currency pair, there may be only a few market makers to accept the trade.

Reflecting on the lessened competition, they will maintain a wider spread. You can watch the most liquid forex parings to get a sense of what a good spread is in forex. You might compare those pairings' spreads to other pairings.

It might also help to compare the spreads between brokerages to ensure you're getting the best deal. High spreads suggest that a pairing is less liquid than other pairs. In other words, fewer traders and fewer dollars are focusing on the pair. The fewer traders focusing on a pair, the less likely it is that someone is willing to offer a price that's closer to the opposing side of the trade.

When trading happens less frequently, the spread increases. Brokerages may also include trading fees in the spread, even if it markets itself as a "commission-free" trading platform. Securities and Exchange Commission. Accessed Dec. In This Article View All. In This Article. The Bid-Ask Spread Defined. Forex Market Makers Determine the Spread. A Sample Calculation. The Cost of the Spread. How to Manage and Minimize the Spread. Frequently Asked Questions FAQs.

Key Takeaways TA forex spread is determined when a facilitator finds a buyer and seller for a pair and adjusts the price slightly on each side. The spread is a transaction fee paid to the facilitator for their services. It is often lower at busy trading times. Note In most cases, the change in value will be slight, and the market maker will still make a profit.

Note The spread may not seem like much, but. What's a good spread in forex? What does a high spread mean in forex? Was this page helpful? Thanks for your feedback! Tell us why! So, the primary goal for investors is to use the spread itself as a way to generate profit when the spread widens or narrows. Spreads are either "bought" or "sold" depending on whether the trade will profit from the widening or narrowing of the spread.

To make profits from a narrowing spread, you need to watch the periods when the difference in the quotes of two assets is greater than the average value. In general, the strategy of making money on spreads is one of the longest, as it requires preparation and works out more often in long-term timeframes. In my memory, there were positions, the implementation of which took about a year.

This strategy is the most conservative, as there is almost no risk. Therefore, it is usually used by large financial institutions, such as pension and insurance funds, and simply by large investors. Let us analyse the position. First, we need to study how two assets have been moving relative to each other over a historical period.

An ideal option would be to overlap two charts, but not all trading platforms provide such a possibility. After overlapping the charts, we need to determine the average price difference for these assets. In the above chart, I marked the most noticeable spread changes on the left. The difference in prices reached 10 USD. Ideally, the position is formed on the expectation that a more expensive asset will depreciate and the cheaper one will appreciate so that the difference in values will narrow.

But such a situation is a rare case. Most commonly, two assets are moving in the same direction and the cheaper asset rises in price faster, thus narrowing the spread.

To avoid risks, one should open a counter position. It means we sell the more expensive oil and buy the cheaper one. After a while, we see that oil starts depreciating, the BRENT sell trade is winning and the WTI buy trade is losing. The strategy would seem to fail. The total position has yielded a profit of 7.

The profit could seem insignificant. But you need to take into account a lot of factors. First, the position is almost risk-free. Second, this is an example for one lot, so it is convenient to calculate. Now, imagine that financial institutions open such positions. They make huge profits with virtually no risk. By the way, this position is one of the ways that banks earn by using depositors' money. This position is opened while betting on the widening of the spread.

You need to spot the moments when the difference in the asset values is the tightest and open a position expecting the spread to widen. Let us look at the right part of the chart above. There is a situation when the prices for BRENT and the WTI are almost equal.

There is an opportunity to make a profit from the spread widening. Here, we shall sell the cheaper asset and buy the more expensive one. So, the total position has made a profit of 4. As you see, the position bears almost no risk. The only risk is time. Above, I wrote that, most commonly, the BRENT is more expensive than the WTI.

In the opposite case, the position will be losing. In this case, you just hold the position on. It should be noted that you can trade spreads using only closely correlated assets. You should not trade spread using assets from different sectors. In the above chart, in addition to the BID and ASK columns, there is the third one that shows the spread size for each trading asset.

You see, spreads are quite narrow for some instruments, about pips. For other assets, the spread size could reach or pips. There are several factors affecting the spread width.

First of all, the spread is affected by the liquidity of the trading instrument. In simple terms, liquidity is the popularity of a trading instrument. The more trades conducted with an asset, the more liquid it is. This is a key parameter to calculate the spread size. High liquidity always correlates to a tight spread. And vice versa, low liquidity corresponds to a wide spread.

You can see from the above table that the popular currency pairs are always traded at a narrow spread. This is the law of stock trading. Volatility also greatly affects the size of the spread. When volatility increases, the number of price fluctuations increases, which means that the spread will widen. When volatility declines and price changes occur less often, the spread will narrow. Thus, the spread in the foreign exchange market is an indicator of volatility.

Everyone knows examples when, at the time of publication of important fundamental news, volatility increased sharply, and the spread also increased. The highest volatility was featured by the USD RUB currency pair.

And in some banks, the difference between offer and demand prices reached Another part of the spread is the interest of the intermediary, that is, a broker or dealer. The intermediary sets the broker spread, but without going beyond. Each broker offers its own spread, but in the end, they will be about the same, because the share of the broker in the spread is not so high.

Unpopular brokers set a higher spread, while popular ones, on the contrary, try to reduce it as much as possible in order to attract new customers. There is no great need to calculate the spread in points since it is almost always indicated in your terminal or mobile application. And here's how to convert this spread in points into dollars or euros.

The picture above is a screenshot from the mobile application of my LiteFinance broker. There are two prices in the transaction window, the buying price and the selling price. As we have already found out, these are Bid and Ask prices. Now we need to convert the pip spread into money. I use the account currency, US dollars, so we will need to convert the pips to dollars.

In my example, I decided to enter a trade with a volume of 1 lot. For a volume of 1 lot, the formula for calculating spread will look like this: 1. In my case, it will be equal to 0. If you want to calculate the spread cost for a different trade volume, you need to change the number of currency units. For example, for 0. Of course, you can calculate the spread manually, but trading has advanced quite far and every self-respecting broker has long been providing the service of a trader's calculator, which will calculate the spread and other transaction parameters for you in real-time.

Going back to the spread concept, I want to stress that the buy spread and sell spread are a bit different. When you buy you pay the spread when you enter a trade and when you sell you pay the spread when you exit the trade. Well, now you know how to calculate spread. Let me explain how to quickly learn the spread in a trading terminal and not to waste time on manual сalculation.

I will start with the MetaTrader 4 trading terminal. When you want to enter a trade in the Metatrader terminal, you need to set parameters for the future transaction in the trade window. In the same window, you see the selling price and the buying price. If you compare these two prices in the above example, you will see that the difference between the values is just two pips, 1. It means that the spread at the time of entering a trade is less than a point, 0.

This is a very narrow spread, which is, by the way, normal for this broker. This tab displays the buying and selling prices, and the spread value in a separate field. In this example, the spread is even tighter, 1 pip.

Supposing, we want to enter a EURUSD buy trade. The price of the currency pair is 1. The difference of 1 pip is the difference between buying and selling prices.

As we want to buy, someone should sell. The seller is in the foreign exchange, and its selling price is 1. At this price, the trade will be entered, although the last price in the chart will be 1. This is because we pay the price appointed by the seller. After a while, the price rises and we decide to exit the trade. So, we are going to sell the asset we bought earlier. The buyer sets the price of 1. Thus, summing up all these prices, we see that the price covered the distance between 1.

But we made a profit from the distance between 1. Two missing pips are the spread. As I said, the spread is the difference between the buy price and the sell price. The above chart shows that these prices are currently the same, and the spread is 0.

This is possible only on the ECN accounts. If you are lucky to enter a trade at such a moment you will enter a zero spread forex trade. But do not forget that you will have to pay a commission for the transaction execution.

For major trading instruments, the spread is always expressed in pips. To find out the cost of the spread in the currency of your transaction, you need to convert the pips into money. It is easy if you know the pip value. In the above chart, the spread is one pip. To calculate the cost of the spread we also need the trade volume. As an example, I will use the standard trade volume of one lot.

With a standard volume on the GBPUSD currency pair, the cost of one pip is 1 USD. And since our spread is 1 pip, it will cost 1 USD. Thus, entering a trade with the contract size of one lot, we will pay the spread of 1 USD, which will be charged at the moment of opening the position.

It means that at the moment of opening the trade, we will immediately lose 1 USD, the amount of the spread. So, we should earn at least the amount of spread to break even. Fixed spreads are normally determined by a dealing company for micro- and mini-accounts that are served automatically.

It is the spread whose size is changing, depending on the market situation. The variable spreads are close to the conditions of the real interbank market. However, a floating spread weakens the performance of some trading strategies and makes strategy testing much more difficult.

A fixed spread is determined by the broker. In most cases, a fixed spread is a favourable factor for a trader, but its value is usually higher than a raw market spread.

There are rather few forex brokers offering a fixed spread. The floating spread has become so popular that it has almost completely replaced the fixed spread. There are hardly any advantages in trading with a fixed spread. That is why this type of spread can entirely disappear. No slippage. The slippages are often talked about and most beginner traders are really afraid of a slippage.

In fact, this is a market feature that can be avoided on fixed spread accounts. In other words, the broker will always execute your contract in full, which will avert price slippage. I suppose everyone has witnessed a situation when the spread for a trading instrument sharply widened due to an important news release in the economic calendar. This is the biggest flaw of the floating spread.

But the fixed spreads are not affected by anything, as a broker has set a fixed range for the spread. You always know the spread size. Traders often used automated systems, robots, and scripts, in the forex market. These systems are based on algorithms, and these algorithms are easy to build when you know the spread in advance.

You can always take it into account when setting up order triggering and in the final result. It's hard to find a broker. In the modern forex market, where the leading roles have taken over ECN accounts with NDD order execution technology, that is, without the participation of a broker, it is very difficult to find a broker providing accounts with fixed spreads.

Fixed spreads can usually be applied to cent accounts, which are less and less popular. The fixed spreads are usually rather big. If the broker provides fixed spreads, it must take into account the volatility, its own profit, and the profit of the exchange.

For example, I entered a EURUSD trade with a fixed spread of 20 pips. To compare, the current floating spread for this currency pair is about 0. The choice is obvious. Requotes on the Instant Execution account types. There are several types of trading order execution modes. One of the most popular is the Instant Execution mode.

If you apply the Instant Execution mode and the spread is fixed, you cannot avoid requotes. For scalpers, this is even more dangerous than slippage, because a scalper can destroy the entire system due to one failed order. Floating spread is the most common type of spread nowadays.

It is popular because it is profitable for all parties taking part in the transaction. Brokers and dealers can regulate and adjust it fast to changing market conditions, which allows solving 2 problems at a time: provide clients with higher-quality services and earn at the moments when the spread increases.

This spread fluctuates in a certain range based on changing market conditions. This type of spread is favourable to manual trading. The above chart displays variable spreads for major currency pairs.

As you see, a floating spread seldom exceeds even 1 pip and in most cases, it is from 0. The above screenshot displays the spread in the trading terminal window. At the time of the snapshot, the spread between the buy and sell prices is only 0. Trading with such a low spread is very beneficial for short-term trades, where the spread is one of the main cost items.

Narrow spreads during most of trading session. As we know trading hours in forex are provided by four large exchanges. And since most of the time falls on the work of the European and American trading sessions, variable spreads at this time will be minimal and can widen only in moments of serious shocks, which do not happen so often.

No requotes. I wrote about requotes as a drawback of fixed spreads. Well, in trading with variable spreads everything is vice versa, your trade will be executed in any case.

The only risk here is slippage. There could be zero spread. Sometimes, when the market situation is calm and still, nothing special or extraordinary happens, you can catch a moment when there is no spread at all. I have come across such a situation in trading major currency pairs several times.

The broker is entirely excluded from the trading process. Transactions are executed using the No Dealing Desk technology, which completely excludes the broker from the processes of determining spreads, quotes, and other things.

Thus, traders can be sure that they deal with real market participants and have access to real exchanges. There could be slippages. This is perhaps the biggest flaw of the variable spread. At times of increased volatility, your trade will be executed, but the opening price of the trade may differ from the one at which you planned it.

This happens when the market price changes so quickly that it sometimes goes right through the orders set in the order book. Widening spreads in case of low liquidity. During periods when there is no trading activity in the market, for example, during the Asian trading session, spreads widen to a significant size. This also happens before the market trading closes for the weekend.

Sometimes the spreads widen so much that they become larger than the fixed ones. This circumstance matters for traders using robots and scripts. If your trading robot is supposed to enter a lot of trades in a short period, a floating spread could be a reason for a loss in a series of trades. After describing the disadvantages and advantages of both types of spread, I decided to sum up the most important ones in the table below to determine which of them is the best.

As you can see in the table, the floating spread has more key advantages. This is quite logical, since variable spreads are a necessary condition to make sure that you are trading in the exchange, and the counterparties are real market participants, not the broker itself. When trading with a floating spread, you can always find a moment for your trade when you can pay less.

The only cost for you will be the commission, which will almost always be lower than the fixed spreads. With popular and large brokers, floating or variable spreads are always very close to the raw market ones. As for me, I have long ago chosen to trade with variable spreads. Moreover, my broker LiteFinance provides a spread as close to raw as possible and in recent years I have not taken it into account at all in my strategy, since it is very small.

If so, it needs to consider the interests of all participants in an exchange operation - a trade. The formula looks as following:. The bank provides you with access to exchange operations and charges you a fee.

As for the broker, it is an intermediary in exchange operations that passes your order to the stock exchange and therefore charges a commission for its participation in the process too.

The spread is one of those elements of trading that all the investors, even novices, cannot afford to ignore. In addition, it deeply affects their chances of profit, and especially it does it directly. In order to avoid negative consequences on the activity of trading, it is therefore advisable to make some choices on account of the spread.

For example, the choice of the broker. After all, the spread is related to the relationship trader-broker. It is simple, it offers very low spreads. There is much of talk about spread. To avoid ambiguities, it is important to make a clarification.

The spread in trading has nothing to do with the spread mentioned on TV. That one is an indicator of the value of the Italian public debt with respect to the related German one.

So, what is the spread in trading? In the next paragraph we will give a short but complete definition. The spread is the difference between bid and ask. It is the difference between the real price of an asset and the price with which the trader operates.

It is right, in the majority of cases, and always when talking about spread, the trader does not operate with real prices. It can appear as an uncomfortable truth, even shocking. In reality, it reveals a totally physiologic dynamic. The spread is in fact as legitimate source of profit of the broker, the price the trader has to pay to have guarantee that all their operations are really executed.

The brokers are free to set the spreads as they please. In fact, the game of the acquisition of new clients is also played with the spreads. However, the margin of discretion is not infinite, more and more often certain calculation protocols are executed. Rather than a precise calculation, we signal protocols and factors which impact the spreads more or less the same way. However, there is a constant: the unit of measurement, the pip. Moreover, in the vast majority of cases the broker sets a spread for each of the assets offered.

Anyway, here are the two factors that mostly affect the spread. The higher the liquidity, the lower is the spread. Therefore, the most liquid assets, such as euro-dollar, have the lowest spread, generally of the order of magnitude of some tenth of pip.

The reason is simple: if the asset is liquid it is easier to place orders in the real market, therefore the effort for the broker is minimum. The higher the volatility, the higher is the spread. In this case there is a relationship of inverse proportion. Also in this case the reason is easy to see: if an asset is volatile, the risk that the ratio between bid and ask disadvantages the broker is higher. When talking about spreads, we should distinguish between fixed and variable.

Some brokers opt for fixed spreads, others for the variable ones. It really depends on the case, neither of the alternatives prevails on the other. However, which option favours the trader? In reality, to answer this question we need to look at minimum spread set by the broker.

If it is high, the fixed spread is more convenient to the trader. In fact, if it already starts from a high basis, even variations of increase by some pips can cause serious damage.

In a scenario now saturated with brokers, it is Key To Markets to offer the most favourable setup to the traders. In fact, it proposes very low and variable spreads. We have already mentioned that the spreads are decided by the brokers with a certain margin of discretion. This relative freedom can cause some disorientation to the trader.

Substantially, they might not understand, at least not at first, when a spread is high or low. The most effective way to assess the spreads is to compare them with those from other brokers.

The most rapid, but still effective way is to identify a benchmark and make a single comparison. This benchmark may well be Key To Markets. In line with tradition, it is the euro-dollar pair which has the lowest spread. We are considering mobile values, that is true, however the spread is around 0.

The other pairs follow: pound-euro 0. Gold has a slightly higher spread, around 1. Reasonably low are also the spreads of the commodities. For example, the Brent and the WTI, rarely go above 0. Trade with more than 40 products, take advantage of leverage options up to , access the account from all desktop and mobilke devices, trade with scalping strategies and robots and with a segregated account. What is the spread There is much of talk about spread. The definition of spread The spread is the difference between bid and ask.

How the spread is calculated Rather than a precise calculation, we signal protocols and factors which impact the spreads more or less the same way. Fixed or variable spreads When talking about spreads, we should distinguish between fixed and variable.

How to asses the spreads? Therefore, it is advisable to consider values that Key To Markets can offer in terms of spread. Trade with a Real ECN Account. Do You Want to Improve and Automate your Trading Results?

Start trading with a REAL ECN ACCOUNT. Open a Trading Account.

As the spread is based on the last large number in the price quote, it equates to a spread of 1. It might also help to compare the spreads between brokerages to ensure you're getting the best deal. Get the most popular posts to your email. First, we need to study how two assets have been moving relative to each other over a historical period. Cryptocurrency trading examples What are cryptocurrencies? For example: The bid price is 1. Practise trading the forex market risk-free with a demo account , using virtual funds.

Categories:

• Forex
• Forex Brokers
• Forex Bitcoin
• Binary Options online
• Binary Options