When you trade on the forex market you need to consider the spreads that you are getting. Spreads are the way that forex brokers make their money without having to charge traders a commission. You need to consider how the spreads are calculated and how they can affect you trading. You should also consider some tips that help you trade with the spreads that you are getting.
What are Foreign Exchange Rate Spreads?
When you trade the foreign exchange rate you are going to given two different prices. The first price is the ask price which is the price that the broker will buy the currency pair for. The second price is the bid price which is the price that the broker is willing to sell the currency pair for. The spread is the difference between the two prices.
There are two ways that brokers set the foreign exchange rate spreads. The first is on a fixed scheme where the spread is the same all the time. The second way is through a variable spread scheme where the spread varies depending on the market movements.
Finding the Best Spreads
Most retail forex brokers will use variable spread, but there are many who offer fixed spreads. A lot of new traders assume that fixed spreads are better because they remain the same. However, the best spread will depend on the strategy that is being used. Some strategies work best with the variable spreads while others work best with the fixed spreads.
A problem that you may find with fixed spreads is that they are not as tight as variable spreads can be. There are times when the variable spread can be as little as 1.5 pips. This is an amount that the fixed spreads will never be set at.
The Impact of Spreads on Trading
The spreads that you get could have a major impact on your trading. Long-term trading is generally not affected as much by the spreads as short-term trading. The length of the trades will negate the impact of the spreads. However, short-term traders need to be careful with spreads because they affect the profits they can make.
To make a profit on the forex market you need to clear the price of the spreads. This means that if you enter the market at 1.0002 with a spread of 5 pips you will only start to make a profit at 1.0008. This can be a major problem for a lot of short-term traders as they are looking at limited pip profits.
Tips to Using the Spreads You Get
There is nothing you can do to change the spreads that you are getting other than looking for a different broker. The fact that most brokers use variable spreads means that you are going to be getting similar spreads with all brokers. There are some tips that you can use to ensure that you are getting the most out of your trading with the spreads you are getting.
The first tip is to always look for brokers that offer you the best spreads when you start trading. The second tip is to consider the use of different order types that could compensate for the spreads. You should also look at brokers that offer you spreads which suit the type of trading you are looking at.
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