Understanding the Spread(Spread) in Forex Trading

Spread(Spread) is a fundamental concept that every trader needs to understand. Knowing how it works helps you plan your trading strategies intelligently and reasonably. Let’s take a look at how Spread(Spread) works and why it is important for trading.

What is Spread(Spread)

By definition, Spread(Spread) is the difference between the Bid Price(Bid Price) and the Ask Price(Ask Price) of any asset, whether it is currency, securities, or commodities.

In different contexts, Spread(Spread) means:

• Forex Market: Spread(Spread) refers to the difference between Bid and Ask for currency pairs, such as EUR/USD.
• Stock Market: Spread(Spread) indicates the gap between the prices at which investors can buy and sell stocks.
• Cryptocurrency: Spread(Spread) is the difference between Bid and Ask of the coin.

To make it easier to understand, think of selling gold. If you buy gold at a certain price and want to sell for profit, you need to sell at least at a price that includes the spread.

For example, if the platform shows:

• Bid price for EUR/USD: 1.05672
• Ask price for EUR/USD: 1.05680

This means if you buy and close the position immediately, you will lose 0.8 pips. Meanwhile, the broker earns 0.8 pips as a fee. This is the primary way most Forex brokers generate revenue from transactions.

Spread$500 Spread$501 tells us about market liquidity

The amount of Spread(Spread) can be used to measure market liquidity. Under normal market conditions, the difference between Bid and Ask for major currencies is about 0.001%.

However, if you see the Spread(Spread) widen to 1-2%, it indicates low market liquidity, which often occurs during major news releases or in highly volatile markets.

Spread(Spread) has 2 types: Fixed and Variable

( Fixed Spread )Fixed Spread###

A fixed spread is a predetermined difference that remains constant at all times. The broker sets and controls this value regardless of market conditions.

Advantages of fixed spread:

• You can calculate trading costs accurately since this value does not change.
• Easy to plan and estimate.

Disadvantages of fixed spread:

• Risk of Requote often occurs. During high volatility, brokers may change the spread(Spread) without prior notice. This can “block” your system and force you to accept new prices, which are often worse, to continue trading.
• This method can disrupt your trading plans, especially when the market changes rapidly.

( Variable or Floating Spread )Floating Spread###

A floating spread varies constantly according to the Bid and Ask changes in the real market. Brokers pass on market prices without interference.

Advantages of floating spread:

• Skilled and fast traders benefit because the cost is often lower than fixed spreads, especially during high liquidity periods.
• No Requote occurs since the spread(Spread) fluctuates naturally with the market, not set by the broker.

Disadvantages of floating spread:

• Not suitable for profit-taking traders because the spread(Spread) can be highly volatile. A 2 pip difference can suddenly become 20 pips, for example, when NFP employment data is released(.

• May not be suitable for beginners, as high volatility can wipe out your entire capital easily.

Which type is better?

There is no definitive answer, as both have advantages and disadvantages. The best choice depends on your trading style and strategy:

• Retail traders who trade infrequently may benefit from fixed spreads due to predictability.
• Large traders who trade frequently and in large volumes, especially during high volatility, may benefit more from floating spreads.
• Those who want to avoid Requote should choose floating spreads.

Tips to reduce trading costs from spreads)Spread(

To maximize efficiency, consider:

1. Choose a broker with low and stable spreads)Spread(. Find providers with minimal fluctuation in spreads.
2. Trade major currency pairs like EUR/USD and GBP/USD, which have high liquidity and lower spreads)Spread( compared to minor or exotic pairs.
3. Avoid trading during major news releases when spreads)Spread( tend to widen rapidly.
4. Understand how spreads)Spread( work to help you select appropriate strategies and better manage trading costs.

Summary

Forex trading is a planned investment activity, not gambling. With an understanding of Spread)Spread(, you can design better strategies, control costs, and increase your chances of success. Those who understand the trading system and Spread)Spread( thoroughly tend to have higher success rates.