The spread and cost per trade

Surely you are tired of seeing or hearing that forex brokers do not charge commission. Well, there are yes, there are no. More and more people are switching to charging a commission and offering flexible spreads and not fixed spreads. What have you said? Spread ?? Let me explain what the spread is.

The trading price of a currency pair is expressed by the pair (two names) and the price (two values):

Base Currency / Quoted Currency | bid price / ask price

The Bid is the maximum price at which the market is willing to buy (for this reason it is also known as the ask price). Therefore, it is the price you will enter if you sell .

The Ask is the minimum price at which the market is willing to sell (for this reason it is also known as the offer price ). Therefore, it will be the price at which you will enter if you buy .

Normally you will see the Bid price on the chart, this is the price at which you will enter the trade if you sell. The ask price is the price you will enter if you buy. The difference between Bid / Ask is the spread. Therefore the spread is expressed in points.

Example: You open a buy order in EUR / USD when the quote is 1.5756 / 1.5758. As you are going to buy, you will enter 1.5758, which is the price at which the market is willing to sell. As soon as you enter you see that your position is with -2 points. This is because to get out of the buy position what you will do is sell, so the exit price is 1.5756 and your entry price has been 1.5758. You have paid 2 spread points. Later the price goes to 1.5788 (that you see on the chart), the quote is 1.5788 / 1.5790 and you close the trade. When closing the buy operation, what you do is sell, so the closing price is 1.5788. You earn 30 points (starting price minus entry price). As you can see, you have entered the Ask price and exited the Bid price, you have paid that difference to the broker.

In the same way, if the operation is for sale, you enter at the bid price and exit at the ask price, paying the spread.

Therefore the spread represents the cost per operation.

The spread is something natural in the market and is not fixed. Brokers that do not charge commission charge a number of points that add in a fixed way to the natural spread of the market, for example, they can increase the spread by always adding two points to the quoted price of the EUR / USD pair. In brokers where they have flexible spreads and charge a commission, the commission and the spread will have to be added as the operating cost, although in this case there will be times when the spread will be 0.

The brokers do not charge commission often called “fixed spread” as they maintain a fixed spread most of the time.

In this image you can see an example of a spread of 2 points in EUR / USD.

As we saw in the previous lesson, if the trade was made with a mini lot , a cost of 2 points in a trade on the EUR / USD pair is 2 USD.

What else should you know about the spread? You will find numerous discussions about the width of the spread, that if my broker has increased the spread by 80 points when such news occurred, that mine did it by 50 at that time …… .no broker offers really fixed spread if you read the letter small when a broker says the fixed spread of 2 points in EUR / USD it marks it with an asterisk and when you read the asterisk it says: In normal market conditions. And it is that the moments of great volatility, in which very fast movements of the market take place, and that normally coincide with the publication of news of great importance for the market, spreads tend to widen, theories of why this happens there are many, yes is it legal or not, etc. I am not going to enter the debate as it would be endless. liquidity of the broker and the change of broker should be considered (you can read the series How a broker works to see why increases in the spread at certain times are normal and natural).

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