What Is A Spread?
When trading the forex markets the most common fee is paying a spread. This is important to when it comes to forex trading for beginners.
The spread is the difference between the bid/offer price.
Or the buy/sell price.
For example, if the bid was 1.1500 and the offer was 1.1505 then the spread would be 5 pips. (1.1505-1.1500 = 5pips). The spread is the price you pay to enter the trade.
So in this instance, you would pay 5 pips to enter and exit the trade.
5 pip spread is very high, you should look for brokers that offer 0.0 spreads to make trader cheaper and your entry levels more reliable. We’ll discuss this later on.
To monetise what the spread means would depend on what asset you are trading and how much you are trading.
For example, if you traded EURUSD with 10,000 EUR with a 5 pip spread, this would cost you 0.50 cents to enter & exit the trade.
This is called a round-trade where you pay 50 cents to buy then 50 cents to sell when you want to exit the market.
However, if you did the same as the above but with 100,000 EUR and a 5 pip spread, this would cost you 5 Euros to enter the trade and 5 euros to exit the trade. This equates to 10 EUR per 100,000 EUR traded.
The above are just examples, but as a broker or market maker, you can see how lucrative it is to offer spreads on the market rates?
So that is essentially what is a spread, next let’s look at how the markets are shown to us via the market.
Each Forex product you see on your platform is traded in currency pairs. The country on the left is the side you are buying if you think the price of the pair will increase and the country on the right is the side you are selling if you think the price will decrease.
For example, if you think the EUR/USD will increase – you click “Buy” and that transaction is Buy EUR and Sell USD.
Above is an example of an Order Ticket on the MT4 platform.
You can see the Tick chart on the left
The symbol at the top
The volume – which is the trade size
Stop Loss & Take Profit Levels
Type: Pending order or Market Execution.
Sell by Market and Buy by Market
(We will go through this in more detail in our MT4 section, but for now, you just need to visualise the trade ticket).
To make an order, you simply press either the Buy by Market or Sell by Market button and it’ll execute the trade at the best execution price instantly.
As you can see in this example there is a 0 pip spread between the selling price and buy price, which is optimal for trading.
If there was a 2 pip spread in the Market Execution box you would see:
1.1346 / 1.1344
Which would set you back 2 pips.
The best way to visualise this is that when you enter a trade you will be in a losing position because of the spread.
In this example with another broker, you can see that there is 2 pip spread and by entering a trade we would be automatically down by 2 pips.
Therefore, if we were trading 10,000 EURs we would be down 1 EUR just for opening the position. 0.5 cent per pip x 2 pips = 1 EUR.
Beginning to see how important pips are?
The clear difference between the two Order Tickets here is that 1 would cost 1 EUR to enter and 1 EUR to exit, whereas the first one wouldn’t cost us anything in terms of pips.