Within forex trading, the spread represents both a critical concept and one that traders commonly misunderstand. Successful trading requires traders to understand spreads because they directly affect trading performance.
This comprehensive guide covers all aspects of spreads in forex trading including their definition, measurement techniques, different types, costs and calculations as well as fixed versus variable spreads.
After completing this guide you'll understand this essential forex trading concept completely.
What is a Spread in Forex Trading?
The spread represents the gap between the bid price at which you sell and the ask price you pay for buying a currency pair in forex trading.
The ask price is what you pay when purchasing currency. In forex transactions you collect the bid price when you sell currency. Market makers gain their earnings from the spread because they serve as intermediaries to match buyers and sellers and maintain market liquidity.
The spread determines trading costs because you never acquire assets at the bid price or dispose of them at the ask price; instead you compensate for the spread.
The EUR/USD currency pair quoted at 1.1300/1.1303 has 1.1300 as the bid price while 1.1303 serves as the ask price. In this scenario the price spread amounts to 3 pips as it represents the difference between these two prices.
Opening a new position requires you to purchase at the ask price of 1.1303 and sell at the bid price of 1.1300 which results in a 3 pip loss due to the spread. Narrower spreads result in lower trading costs for you.
How is the Spread in Forex Trading Measured?
Multiple methods exist for measuring spreads in forex markets.
- Pip spread: The pip spread serves as the standard measurement for quoting spreads. Major currency pairs typically have spreads quoted in decimal pips (0.0001) while minor pairs use full integer pips (0.00001).
- Percentage spread: The spread can be calculated by expressing it as a percentage of the mid-market price. Traders receive an understanding of cost in proportion to their position value through this measurement.
- Points spread: Certain brokers present spreads for instrument pairs involving indices and stocks in points notation.
- Raw spread: Raw spread indicates the basic price gap between buying and selling rates without factoring in any extra commissions or fees.
Knowing the different ways spreads are measured helps traders assess broker services more accurately and understand their trading expenses.
BlueSuisse presents spreads in decimal pips format while its platform gives traders access to both the basic spread value and complete transaction costs.
What Types of Spreads Are in Forex Trading?
Multiple categories of spreads operate within the forex market.
- Fixed spread: The spread maintains its fixed value through all market conditions. The fixed spread offers predictable costs but its width may exceed that of variable spreads during market volatility.
- Variable spread: The spread varies depending on liquidity conditions and market volatility levels. The spread remains narrow during stable market conditions but expands during volatile periods and times of significant news events when liquidity decreases.
- Dynamic spread: This hybrid model establishes predefined conditions set by the broker which determine how the spread fluctuates within certain boundaries.
- No-dealing desk spread: ECN/STP brokers that operate without a dealing desk implement this model to match buyers and sellers. Trading spreads remain narrow while traders might incur commission fees.
Assessing the advantages and disadvantages of different broker models is critical when selecting a broker.
BlueSuisse provides traders with our distinctive variable spread model that delivers optimal spreads under every market condition.
Spread Costs and Calculations in Forex Trading
Calculating spread costs is essential in determining your actual trading expenses.
The two main spread calculations are:
- Round-turn spread: The round-turn spread calculation shows the complete cost of opening and closing a trade. The calculation of the spread cost requires multiplying the spread amount by the lot size. A standard lot with a 3 pip spread costs traders $3 for a complete round turn.
- Daily swap/rollover costs: When you maintain a position into the next trading day it generates either interest credits or debits which depend on prevailing interest rates. This must be factored into profit/loss calculations.
Trading costs are affected by commissions as well as inactivity fees and currency conversion fees when leverage is involved. A BlueSuisse demo account allows traders to simulate transactions so that they can fully understand their complete trading costs.
Our platform provides tight spreads and low commissions along with powerful calculators which help you optimize your forex trading strategy.
Fixed vs Variable Spreads: Which Is Better in the Forex Trading Market?
The spread market utilizes two primary models which are fixed and variable.
Each has its pros and cons:
Fixed spread pros:
- The ability to calculate risk becomes simpler when costs remain predictable
- Spreads remain stable through all market conditions
Fixed spread cons:
- Wider spreads reduce possible profits for traders.
- Cannot adjust to changing liquidity environments
Variable spread pros:
- Stable market conditions cause spreads to narrow which benefits trading operations
- Can widen to protect brokers during volatility
- More realistic model of true market liquidity
Variable spread cons:
- The costs remain unpredictable because they change according to different market conditions.
- Spreads may spike during high impact news/events
The majority of high-ranking brokers currently operate under a hybrid dynamic model. Our unique variable spread approach at BlueSuisse delivers both tight, competitive spreads under usual market conditions and protective measures for traders and brokers when liquidity becomes abnormal.
Our platforms and calculators provide traders with complete transparency of spreads and costs. Traders can make well-informed choices due to current market conditions.
Most forex traders find better results with a well-regulated variable model for trading spreads.
A forex trader must understand spreads, their mechanisms and their effect on trading expenses. Mastering pip spreads and spread calculation methods along with understanding fixed versus variable models enables traders to refine their strategies and select the best brokerage service.
BlueSuisse focuses on delivering traders with efficient spreads while offering complete cost visibility and powerful tools for expense analysis and reduction. Open a demo trading account now and explore firsthand how our distinctive variable spread model works.
The service includes access to high-level trading platforms in addition to educational resources and an expert community of traders and analysts.
Launch your forex trading journey through BlueSuisse to benefit from narrow spreads and deep liquidity along with our dedication to excellence.
Apply for your live forex account now by visiting BlueSuisse to begin your trading experience with one of the most trusted names in online investing.