What is Spread?
Spread is a very important part of trading and you should not overlook it. It should be in the interest of every trader to have the lowest possible spread with a quality broker. It could be said that the size of the spread is more important for shorter traders than for swing traders who make a few long-term trades per month / year. The fact is that there are few traders who open a position only once.
In daily trading, the trader saves significant amounts on the spread. There is a difference between trading EUR / USD with a spread of 2 points and 8 points. The 6-point difference for the trader means 6 points, which he could credit to the profit in each trade. You can also tell the one-point difference, if you make 30 trades a month, you have 30 points for good.
At this time, almost every broker claims to have the narrowest spread in the industry. However, marketing talk can sometimes be misleading. The subject of spreads in the forex spot market is surprisingly complex and is often misunderstood by many. However, nothing affects your trading profits more than the spread. We will try to bring some light to the whole matter.
First, the spread is the difference between the ask price (bid price) and the bid price (price you sell), which is quoted in pips. If the difference between EUR / USD at the moment is 1.2102 / 4, then the spread is 2 points. If the difference is 1.2104 / 9, then the spread is 5 pips.
Wider spreads result in a higher ask price and a lower bid price. As a result, you always pay more when you buy and you get less when you sell, it is harder to earn then.
Brokers usually do not earn the entire spread, especially when hedging client positions. The spread compensates the market maker for the risk from the time the client executes the trade until the total exposure of the broker is negotiated (quite possibly at a different price).
Spreads affect your return
Probably more than you might think. As a trader, your only interest is to buy low and sell high. Wider spreads mean buy higher and sell lower. Spread one pip lower doesn’t sound like much, but it can easily make the difference between a profitable trading strategy and a non-profit.
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