Spread (forex spread).
Currency trading is always conducted through specialized intermediaries, brokers, or dealing centers, who charge a commission for their services, known as a spread.
Spread (forex spread) is the difference between the price at which you can currently buy or sell a currency. It's usually calculated using a simple formula: the ask price minus the bid price, which results in the current spread for a given currency pair.
This indicator is the primary source of income for any forex broker. This commission is charged when opening each new forex trade, regardless of its direction. For example, if currency pair quote reads bid 1.3000 ask 1.3002, the spread is only 2 pips. If you open a trade on this asset, these two pips will immediately appear as a loss in the trading terminal.
Currency liquidity and spread size.
These two concepts are usually closely related: the more liquid and in-demand the chosen currency, the lower the broker's commission for opening a trade.
The difference can sometimes be measured in tens of pips. For example, the spread on EURUSD ranges from 0.5 to 3 pips depending on the dealing center's trading conditions. If you decide to trade an exotic instrument like USDZAR, you'll have to pay up to 50 pips per trade. Clearly, in the latter case, the likelihood of making a profit decreases significantly.
Therefore, most traders use currency pairs in which one of the components is the euro or the US dollar.
Floating or fixed.
Forex spreads can be fixed or fluctuate depending on market liquidity.
Fixed spreads always correspond to those specified in the trading instrument specifications. This option is primarily used for trading on the Dealing Desk system and is less attractive for scalping . They are generally higher than floating spreads, but don't require constant monitoring.
Floating spreads fluctuate over a fairly wide range; for example, for EURUSD, they can range from 0.2 to 5 pips, so with the right skills, you can open trades with virtually no additional costs. However, some brokers, in order to extract profits from clients trading on accounts with floating spreads, impose an additional commission on each lot.
Importance in trade.
Here, everything depends on factors such as trading volume and the size of your own deposit.
A concrete example makes this clearer.
You're trading exclusively with your own capital of $100,000, opening 1-lot trades. In this case, 1 spread pip is equivalent to approximately $10—not much relative to your main deposit.
But if your deposit is only $200, and you're using 1:500 leverage, also trading 1 lot, paying $10 for each spread pip, its importance cannot be underestimated.
Don't forget the number of trades, too; the spread across them will be cumulative. For example, if you open one 1-lot trade in a 24-hour period, and the spread is 2 pips, you'll only pay $20. If you had 10 such trades, the commission would increase to $200.
