Forex Foreign Exchange Spreads
In forex trading advertisement we often see the brokers mentioning “no commission”, and it is true that those who say that don’t charge commission from the investors. But how do they make money then? They are not performing for free! They make money from the forex foreign exchange spreads.
Forex foreign exchange spreads are the differences between the bid prices and the ask prices. Bid price is the selling price while Ask price is the buying price. Spread is the cost that an investor has to give when taking a position in forex market.
The broker adds this spread onto the price of the trade and keeps it as their fee for the trading. We know that in foreign exchange trade the currencies are quoted in pairs like USD/CAD. The first currency is called the base currency while the second currency is called the counter or quote currency.
In the above-mentioned currency pair i.e. USD/CAD, the base currency is USD and the quote currency is CAD. Bid is the price at which you can buy the base currency (USD) in exchange for the counter or quote currency, which is CAD in our example.
Conversely, the ask price is the price at which you have to sell the base currency in exchange for the counter currency.
Forex prices are always quoted in numbers. So if you see USD/CAD bid price is 120.00 and the ask price is 120.05, the spread would be 0.05 or $0.0005. Now, let’s see how it works:
A USD/CAD pair is quoted at 1.9346 Bid and 1.9350 Ask.
This means, you have to pay 1.9350 if you like to buy this at this moment but you will get only 1.9346 if you sell it at the same moment. Here, there is a four pip difference between the bid price and the ask price. That means, the spread rate is four PIP.
You should know that the quotes change frequently, as trades are made and new price levels are established. However, the spread difference does not normally change for a given market.
The Forex spread rates can vary from broker to broker and spreads can also vary based on what currencies you are trading and what type of account you open. The most popular currency pairs like the EUR/USD or GBP/USD have the lowest spreads. But the currencies that have less demand will likely to be traded with higher spreads.
Therefore, be sure about the Forex spreads before you are trading a currency. There are different spreads for different types of accounts. E.g. a Mini account may have higher spreads that a full Contact Account.
In summary, Forex foreign exchange spreads are truly your most important consideration for forex trading costs and a small difference in the spread can really add up to thousands of dollars in trading costs.
Interested in trading Forex? Read our reviews to learn which brokers offer the best and most competitive Forex trading spreads.
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