Let’s take a few minutes to talk about spread Forex meaning and why when you are choosing a Forex broker low spread is one of the main things to look out for.
Posted 2 months ago in Economics and Trade.
Among many other things one has to understand before starting to trade, learning what is spread in Forex is a crucial part of your future success. Depending on the size of the spread the trader might choose to adjust the strategy or even stop trading altogether for several hours. Let’s take a few minutes to talk about spread Forex meaning and why when you are choosing a Forex broker low spread is one of the main things to look out for.
Like a lot of other currency trading terms, spread is not something complicated, it is just technical. In simple words the Forex spread indicator will show the difference between two values: the price at which the currency will be bought by the broker and at which it will be sold. The spreads are expressed in pips and tend to be smaller when more popular currencies are involved. The reason for this is nothing more than basic supply and demand. In Forex terms it will mean that the currencies with low spreads generally have high liquidity and low volatility. Liquidity is the volume of activity in the market, while volatility is a tendency to change fast and unpredictably. As you can see, it is very self-explanatory why you would want the spread to be as low as possible.
Another important thing to understand about spreads is that they are not fixed and can fluctuate depending on various factors. For example, they tend to widen during the slow trading hours, when most of the traders are inactive. Same will happen before highly anticipated news releases or in times of major political events such as elections or G7 summit. For a trader a high spread in most cases will mean higher losses. And on the other hand, low spread in Forex means smaller difference between price indicators and therefore, less risk and losses.
The size of the spread can also depend on the specific broker. Here it is important to remember that even though the broker has some profit from the spread, it is not the same as the commission. So, ideally you need to find a broker to trade Forex with low spread and small commissions or no commissions at all. As was mentioned before, the currencies with high liquidity tend to have lower spreads. This means that when you are choosing between low spread Forex brokers you should first consider the ones that operate globally. Having the clients from all over the world provides the broker with the possibility to lower the spread and offer a wide range of additional services.
Additionally, every broker will allow you to select the account type you will be using for your trades. And as a general rule of thumb, the higher the value of the account the lower the spread. This means that experienced traders have access to lower spreads and can afford to increase their trading volume. But even if you are new to trading, there will always be a possibility to find a broker who offers low spreads, especially if you start trading with more common currency pairs (for example USD/GBP).