5-What Is A Spread in Forex Trading

3/15/24, 1:40 PM What is a Spread in Forex Trading? - BabyPips.
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What is a Spread in Forex Trading?
Forex brokers will quote you two different prices for a

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currency pair: the bid and ask price. Find a Broker
The “bid” is the price at which you can SELL the base
currency.
The “ask” is the price at which you can BUY the base
currency.
The difference between these two prices is known as the

spread.
Also known as the “bid/ask spread“.
The spread is how “no commission” brokers make their money.
This spread is the fee for providing transaction immediacy. This is why the
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terms “transaction cost” andcost
with lowest “bid-ask spread” are used interchangeably.
with CopyTrader
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3/15/24, 1:40 PM What is a Spread in Forex Trading? - BabyPips.com
Instead of charging a separate fee for making a trade, the cost is built into the
buy and sell price of the currency pair you want to trade.
From a business standpoint, this makes sense. The broker provides a service
and has to make money somehow.
They make money by selling the currency to you for more than they
paid to buy it.
And they also make money by buying the currency from you for less
than they will receive when they sell it.
This difference is called the spread.
It’s just like if you were trying to sell your old iPhone to a store that buys used
iPhones. (A smartphone with only two rear cameras? Yuck!)

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with lowest cost with CopyTrader
In order to make a profit, it will need to buy your iPhone at a price lower than
the price it’ll sell it for.
If it can sell the iPhone for $500, then if it wants to make any money, the most
it can buy from you is $499.
That difference of $1 is the spread.
So when a broker claims “zero commissions” or “no commission”, it’s

misleading because while there is no separate commission fee, you still pay a
commission.
It’s just built into the bid/ask spread!
How is the Spread in Forex Trading

Measured?
The spread is usually measured in pips, which is the smallest unit of the price
movement of a currency pair.
For most currency pairs, one pip is equal to 0.0001.
An example of a 2 pip spread for EUR/USD would be 1.1051/1.1053.

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Currency pairs involving the Japanese yen are quoted to only 2 decimal
places (unless there are fractional pips, then it’s 3 decimals).
For example, USD/JPY would be 110.00/110.04. This quote indicates a

spread of 4 pips.
What Types of Spreads are in Forex?
The type of spreads that you’ll see on a trading platform depends on the forex
broker and how they make money.
There are two types of spreads:

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1. Fixed
2. Variable (also known as “floating”)
Fixed spreads are usually offered by brokers that operate as a market maker
or “dealing desk” model while variable spreads are offered by brokers
operating a “non-dealing desk” model.
What are Fixed Spreads in Forex?
Fixed spreads stay the same regardless of what market conditions are at any
given time. In other words, whether the market is volatile like Kanye’s moods
or quiet as a mouse, the spread is not affected. It stays the same.

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Fixed spreads are offered by brokers that operate as a market maker or

“dealing desk” model.
Using a dealing desk, the broker buys large positions from their liquidity
provider(s) and offers these positions in smaller sizes to traders.
This means that the broker acts as the counterparty to their clients’ trades.
Having a dealing desk, allows the forex broker to offer fixed spreads because
they are able to control the prices they display to their clients.
What are the Advantages of Trading With

Fixed Spreads?
Fixed spreads have smaller capital requirements, so trading with fixed

spreads offers a cheaper alternative for traders who don’t have a lot of money
to start trading with.
Trading with fixed spreads also makes calculating transaction costs more
predictable.
Since spreads never change, you’re always sure of what you can expect to
pay when you open a trade.
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What are the Disadvantages of Trading

With Fixed Spreads?
Requotes can occur frequently when trading with fixed spreads since pricing
is coming from just one source (your broker).
And by frequently, we mean almost as frequently as Instagram posts from

Kardashian sisters!
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There will be times when the forex market is volatile and prices are rapidly
changing. Since spreads are fixed, the broker won’t be able to widen the
spread to adjust for current market conditions.
So if you try to enter a trade at a specific price, the broker will “block” the
trade and ask you to accept a new price. You will be “re-quoted” with a new
price.
The requote message will appear on your trading platform letting you know
that price has moved and asks you whether or not you are willing to accept
that price. It’s almost always a price that is worse than the one you ordered.
Slippage is another problem. When prices are moving fast, the broker is
unable to consistently maintain a fixed spread and the price that you finally
end up after entering a trade will be totally different than the intended entry
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Slippage is similar to when you swipe right on Tinder and agree to meet up
with that hot gal or guy for coffee and realize the actual person in front of you
looks nothing like the photo.
What are Variable Spreads in Forex?
As the name suggests, variable spreads are always changing. With variable
spreads, the difference between the bid and ask prices of currency pairs is
constantly changing.
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Variable spreads are offered by non-dealing desk brokers. Non-dealing desk

brokers get their pricing of currency pairs from multiple liquidity providers and
pass on these prices to the trader without the intervention of a dealing desk.
This means they have no control over the spreads. And spreads will widen or
tighten based on the supply and demand of currencies and the overall
market volatility.
Typically, spreads widen during economic data releases as well as other

periods when the liquidity in the market decreases (like during holidays and
when the zombie apocalypse begins).

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For example, you may want to buy EURUSD with a spread of 2 pips, but just
when you’re about to click buy, the U.S. unemployment report is released and
the spread rapidly widens to 20 pips!
Oh, and spreads may also widen when Trump randomly tweets about the
U.S. dollar when he was still the President.

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What are the Advantages of Trading With

Variable Spreads?
Variable spreads eliminate experiencing requotes. This is because the

variation in the spread factors in changes in price due to market conditions.
(But just because you won’t get requoted doesn’t mean you won’t experience
slippage.)
Trading forex with variable spreads also provides more transparent pricing,
especially when you consider that having access to prices from multiple
liquidity providers usually means better pricing due to competition.
What are the Disadvantages of Trading

With Variable Spreads?
Variable spreads aren’t ideal for scalpers. The widened spreads can quickly
eat into any profits that the scalper makes.
Variable spreads are just as bad for news traders. Spread may widen so
much that what looks like a profitable can turn into an unprofitable within a
blink of an eye.
Fixed vs Variable Spreads: Which is Better?

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The question of which is a better option between fixed and variable spreads
depends on the need of the trader.
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There are traders who may find fixed spreads better than using variable
spread brokers. The reverse may also be true for other traders.
Generally speaking, traders with smaller accounts and who trade less
frequently will benefit from fixed spread pricing.
And traders with larger accounts who trade frequently during peak market
hours (when spreads are the tightest) will benefit from variable spreads.
Traders who want fast trade execution and need to avoid requotes will want to
trade with variable spreads.
Spread Costs and Calculations

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Now that you know what a spread is, and the two different types of spreads,
you need to know one more thing…
How the spread relates to actual transaction costs.
It’s pretty easy to calculate and all you need are two things:
1. The value per pip
2. The number of lots you’re trading
Let’s look at an example…
In the quote above, you can buy EURUSD at 1.35640 and sell EURUSD at
1.35626.

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This means if you were to buy EURUSD and then immediately close it, it
would result in a loss of 1.4 pips.
To figure out the total cost, you would multiply the cost per pip by the number
of lots you’re trading.
So if you’re trading mini lots (10,000 units), the value per pip is $1, so your
transaction cost would be $1.40 to open this trade.
The pip cost is linear. This means that you will need to multiply the cost
per pip by the number of lots you are trading.
If you increase your position size, your transaction cost, which is reflected in
the spread, will rise as well.
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For example, if the spread is 1.4 pips and you’re trading 5 mini lots, then your
transaction cost is $7.00.
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3/15/24, 1:40 PM What is a Spread in Forex Trading? - BabyPips.

Preschool How Do You Trade Forex?

What is a Spread in Forex Trading?

Forex brokers will quote you two different prices for a

The difference between these two prices is known as the

Also known as the “bid/ask spread“.

The spread is how “no commission” brokers make their money.

paid to buy it.

This difference is called the spread.

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That difference of $1 is the spread.

So when a broker claims “zero commissions” or “no commission”, it’s

It’s just built into the bid/ask spread!

How is the Spread in Forex Trading

For most currency pairs, one pip is equal to 0.0001.

An example of a 2 pip spread for EUR/USD would be 1.1051/1.1053.

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For example, USD/JPY would be 110.00/110.04. This quote indicates a

What Types of Spreads are in Forex?

There are two types of spreads:

2. Variable (also known as “floating”)

What are Fixed Spreads in Forex?

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Fixed spreads are offered by brokers that operate as a market maker or

What are the Advantages of Trading With

Fixed spreads have smaller capital requirements, so trading with fixed

What are the Disadvantages of Trading

And by frequently, we mean almost as frequently as Instagram posts from

What are Variable Spreads in Forex?

Variable spreads are offered by non-dealing desk brokers. Non-dealing desk

Typically, spreads widen during economic data releases as well as other

Best MT4 Broker Follow 6k+ Pro Traders

Best MT4 Broker Follow 6k+ Pro Traders

What are the Advantages of Trading With

Variable spreads eliminate experiencing requotes. This is because the

What are the Disadvantages of Trading

Fixed vs Variable Spreads: Which is Better?

Spread Costs and Calculations

How the spread relates to actual transaction costs.

1. The value per pip

2. The number of lots you’re trading

Let’s look at an example…

Best MT4 Broker Follow 6k+ Pro Traders

What to Read Next...

Best MT4 Broker Follow 6k+ Pro Traders

" Do the difficult things while they are easy

LEARN FOREX COMPANY FOREX TOOLS

How to Trade Forex About

Forex Forums Advertise Risk-On / Risk-Off Meter

Forex Glossary Newsletter Position Size Calculator

Forex Margin 101 Testimonials "Back to Breakeven" Calculator

Technical Analysis 101 FAQ Pip Value Calculator

Risk Management 101 Subscribe Pivot Point Calculator

Copyright © 2024 BabyPips.com LLC. All rights reserved.

Best MT4 Broker Follow 6k+ Pro Traders

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