This article looks at forex brokers spreads in detail.
The foreign exchange market is one of the largest trading markets worldwide. It is also one of the most liquid of these trading markets. If you are thinking of trading in this financial environment then you must be aware of certain forex factors, including the forex brokers spread. It is important to know what a spread is and how it can affect your trading.
The forex brokers spread
A spread is a term used regularly in the foreign exchange and other financial trading markets. It is so often used as it affects every trade made. When placing an order there are two different prices quoted – the bid and the ask price. The bid price is the price you will be willing to sell your currency at, and the ask price is the price you are willing to buy the currency at. The general rule states that a bid price is always lower than the ask price.
To understand the spread completely you must be aware that the difference between the two quoted prices is where the foreign exchange brokers will make their money. Unlike the stock exchange, the brokers do not take a commission off trades but rather use a spread. If the spread of a trade is minimal then the trade is said to have a tight spread. However, if the spread is seen to be large then the trade presents with a wide spread.
The forex brokers floating spread
There are several types of forex brokers spreads which you must be aware of. One of the most popular types of spreads is that of the floating spread. When a foreign exchange market fluctuates the spread can become wider and you can be charged these wider spreads. If the spread is tight then the market is stable and presents with good liquidity. It is important you note these conditions as it is during highly liquid times that you will experience the best rates.
Forex brokers or dealers – which are better?
When examining the majority of forex traders, it is interesting to note that many are foreign exchange dealers. Forex dealers do not take a commission profit from closed trades and this is often what attracts traders to their services. However, these individuals do need to earn income somehow and this is through spreads. In order to make more money, the forex dealer will offer wider spreads than forex brokers. However, brokers will usually offer better deals on currencies. The forex broker will also generally charge tighter spreads and smaller fees.
Final words on forex brokers and their spreads
The spread is an important part of forex trading, and it is vital you have an awareness of this concept. Spreads vary according to forex brokers and according to the currency being traded. Certain currencies do not have much liquidity and will present with tighter spreads. However, there are times during the year when overall liquidity of the market is low and all spreads will widen.
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