One of the most important concepts on Forex is the “spread”. If you want to start trading in the foreign exchange market, you need to understand the meaning and characteristics of spreads.
Spread
Spread
Definition
Spread is the difference between the purchase price (Ask) and the sale (Bid) of a currency pair on Forex.
At any exchange office, you can see the difference between the purchase price of a currency and its sale price. This difference is the spread - the main earnings of the bank, engaged in the purchase and sale of foreign currency. The same thing happens on Forex, where the spread is one of the main sources of income.
Spread point
The difference between the purchase price and the sale price is measured in points. Points (pips) are changes in the last digit of the quote. This is usually 2 or 4 digits after the decimal point (or decimal point in the exchange rate).
For example, in the EUR / USD quote - 1.2669 / 1.2672, the spread is 3 points.
The size of the spread depends on market conditions, the liquidity of the currency used and the volume of transactions. It is also important to remember that the higher the trading turnover of a currency pair (liquidity), the lower the spread. Accordingly, the most popular currency pair - USD / EUR will have the smallest spread.
Types of Spreads
There are several types of spreads, each of which is suitable for a certain type of transaction and is recommended for traders with different experience.
Permanent (fixed) spread
a constant spread, always corresponds to the number of points specified in the contract. This spread is not affected by market volatility.
Nevertheless, we provide the opportunity to increase the constant spread in individual cases. This type of spread is well suited for beginners in Forex trading, it is used in short-term transactions, news trading and at night. On our site, this type of spread corresponds to the MT4 Fixed account.
Floating spread
changes every second, along with changes in market conditions. You can set only the lower range of fluctuations, which allows you to get much more diverse sizes of spreads. This type of spread is the most common in Forex trading, is well suited for long-term transactions (week, month) and is recommended for more experienced traders. On our site, this type of spread corresponds to the MT4 NDD No Commission account.
To regulate market liquidity, a spread limit is set on the stock exchanges. When the spread reaches its maximum value, trading is automatically completed.