What is Spread? Understanding the Term Forex for Beginners
In Forex a lot of terms that are foreign to the ears of the new layman familiar with Forex. Our goal this time is to better introduce the layman’s terms so that the beginners can easily understand it.
This discussion is related to Spread which is often heard among forex traders.
Here’s the discussion for you all.
Spread is a difference between supply and demand. Thus we can mean that Spread is the difference of points or pip between the price of demand and the bid price. The difference is the difference between the asking price and the bid price is determined by the broker as the commission they get.
The commission earned by the broker from the price difference will be used to improve the service and raise the network they have. In addition, the commission will be used to pay transactions made to the owners of the trading platform. This happens because the broker is hired by trading platform providers companies.
For example, there are data showing the EUR / USD pair at the price of 1.2519 / 1.2522. In the data means you as a trader can open a buy position on the currency pair with the price 1.2522 and sell it at the price 1.2519. While Spread will be calculated based on the difference in the price is 3 points or pips.
Things you need to pay attention to is the smaller the Spread, the more potential profit you will get. You can choose a forex broker that offers Fix Spread when you are trading in the long run. On the other hand, you can use a small Spread if using the Scalper technique.
Do not be easily tempted by forex brokers who offer smaller spreads. You should consider several other factors before choosing the best broker.
Factors That Can Affect Spread
Market Liquidity and Volatility affect the existing Spread. For example, only the currency pair EUR / USD which became the currency pair that many transacted by the public. These currency pairs are known as currency pairs that have Low Spreads. However, when the market is experiencing a spike or high volatility, then this currency pair can have a large Spread associated with market activity.
In addition, currency pairs that have volatility usually have a large Spread. For example, the GBP / CHF or GBP / NZD currency pair is a currency pair that has high volatility.
For example, you can earn about 50-70 pips in the currency pair above. However, due to the very high daily movement, the currency pairs above have a higher Spread when compared to other currency pairs.
We take another case of the currency pair EUR / USD or USD / JPY included in the low Spread. In order to get 50 pips, it is very difficult to do for this currency pair. The low volatility of the currency pair makes it have a low Spread.
Dynamic Spread and Fix Spread
When you select Fix Spread, the excess you will get is that you no longer need to think about Spreads in the future. Despite market conditions soaring and moving high, Spreads of the above type will not change and tend to remain.
On the other hand, there is a Dynamic Spread whose value is constantly changing over time and is highly dependent on market conditions. When the market is experiencing high volatility and high liquidity, the Spread will be enlarged from the previous. So also when there is important news, then Spread with this type will usually go up from before.
The drawbacks you will experience from dynamic Spread or Floating Spread are uncertain factors. As a trader, you can not predict exactly how much Spread will be earned. Not to mention when the condition of price volatility has increased, then the spread can be widened very quickly. In order to overcome the above, then you need to have mature planning when going into the forex market. It is important to do so as not to miscalculate because of unexpected Spread movements.
Compared to Floating Spread, Fix Spread is perfect for newbies to learn forex trading. In addition, Spread with this type is very suitable for traders who strongly prioritize the stability of trading conditions.
How is the Fixed Spread Value Specified?
Usually, Fix Spread is set based on a larger range of Floating Spreads. For example, there is a broker who has 2 types of accounts that offer a floating and fixed Spread. Try to compare carefully between these 2 accounts Floating Spread amount for EUR / USD at least 1 pips. But for Fixed Spread, the value can reach 3 pips.
In addition to the 2 types of spreads that we have mentioned above, it turns out there are other types of Spread and you need to understand. As the name implies Zero Spread is a 0 pip spread used by the broker against the traders.
When Spread has a 0 pip value, it does not mean you can trade without pip or no cost at all. You are not too familiar with the ins and outs of the world of trading and still in the learning phase needs to learn well conditions like this. In order for you to understand well, you need to understand some of the following points.
When Zero Spread, you are not constantly in the 0 pip range. In terms of the forex brokers, Zero Spread means Spread lower than 1 pip. Thus, Zero Spread refers to Spread ranges like 0.5 pip, 0.2 pip, and 0.1 pip.
Furthermore, brokers often charge trading commissions in Zero Spread accounts. The commission charged is usually expressed directly in the currency unit. The burden will be charged every trading you do in a certain size. For those of you who are just learning the world of forex and still difficult to convert the value of pip into the unit of money. So the commission calculation as mentioned above can make it easier for you.
With the above explorers, then we can know that Zero Spread has no meaning without the Spread at all. Instead, the existing brokers offer lower Spread than usual. With Zero Spread too, brokers can still earn revenue from existing trading commissions.
That is the complete explanation related to the term Spread is in the forex. I hope I can give an explanation to you all.