Forex Spreads

The world of Forex trading can be a confusing and daunting one for those who are completely new to the concept of Forex. Each day, many ordinary people are trying their luck on the Foreign Exchange but still do not have the knowledge that they need, even the fundamental basics of the terminology used, to be able to efficiently trade in the market place. It pays to take a little bit of time to find out what all of the jargon means when it comes to trading Forex. One such term, Forex spreads, should be one of the first that you encounter and learn about in order to help you understand more about Forex trading and its processes.

Essentially, Forex spreads is the term used to describe the amount of between the ask price and the bid price on any currency pair. The spread is normally quoted in terms of pips (sometimes known as points), which is the smallest unit of currency and is likely to be subtracted or added from the fourth decimal place of the ask or bid price. Currencies that are traded on the Foreign Exchange are always quoted in terms of five numbers and are always traded in pairs. The Forex quotes that you will see will also always have a bid price and an ask price.

Forex spreads are basically the way in which the Forex brokers make their money (commission). The broker will gain a profit from the spread of every single trade that is placed through them on their particular network. For example, a broker may be selling a currency that is quoted at 1.2200. This means that the broker will be willing to let you buy this currency for 1.2201 or to sell it for 1.2199. If is important to note too, that if you place a long order then you will receive the bidding price. Once you decide to close that long order then you will receive the asking price. The broker will then collect the difference for this transaction. The amount of the spread will generally always stay around the price at which the broker is selling that particular currency. You may also find that with commonly traded currency pairs on the market, the spread can be as low as 1-2 pips.

This means that with Forex spreads, you will get one end of the spread when you buy a currency and the other end of the spread when you sell a currency. No matter what trades you are making, it is almost certain that the broker will have been paid the spread from you before you close an opened trade.

Now that you know what Forex spreads are you need to be aware that not all spreads are the same. It is recommended that you try and find a broker who has a small spread, particularly if you are new to Forex trading, as this will help you to keep your trading costs down. This practice will also aid you in being able to potentially make a good profit. Having said this, it is important that you do not accept the first broker who offers you a lower spread. There are still some untrustworthy people practicing out there and you do not want to be lured in to a situation where you lose all of your funds due to an unscrupulous broker. Make sure that the broker is regulated and that you are comfortable with where they trade so that those regulations will be adhered to should something go wrong.