Friday, April 29, 2011

Foreign Exchange Spreads

The concept of spreads in the forex trading market is extremely complicated and difficult to understand. However, it is also a fact that it is an important and inevitable parameter that determines your ability to make remarkable profits.
What is Spread in Forex Trading?

Spread in Forex Trading

In the forex market, spreads are the difference between the offer prices and the bidding prices that are quoted in pips. For instance, the quote of GBP/USD is 1.8281/84 which means that the bidding price of GBP is 1.8281 US dollar while the offer price is 1.8284 US dollar. In this particular case, the spread is 3 pips.
Role of Spread in Forex Trading

Spread is an important parameter that helps brokers to make profit in forex trading. Wider spreads indicate a high offer price and a low bidding price. This simply means that you have to pay more when you buy and make fewer amounts when you sell out, this property makes the realization and estimation of profit difficult for forex traders.
Spreads & Trading Skills

The return which you get on your trading skills is greatly affected by the spreads. Being a trader, your ultimate goal is to make profit by buying low and selling high. Traders usually take a half-pip lower spread as granted, but in reality it can make an effective trading strategy into an ineffective strategy.

Spreads & Execution

You can achieve stability and success with spreads only if you work with appropriate execution. The quality of execution identifies whether you are going to get tight spreads or not. You must be aware of the denied trades, slippage, delayed execution and stop hunting which nullifies the effects of tight spread forex trade.

You must always take forex spread into consideration with the depth of the book. In most cases, forex brokers provide tight spreads only for capped trading volumes which are totally inappropriate for the traditional forex trading strategies.
What Forex Brokers Claim?

Tight Spreads

At present, almost all forex brokers claim that they are having the tightest spreads in the forex industry. However, spread terms and policies vary remarkably from one forex broker to another, besides the transactions that are not clear. Some brokers offer non-variable spreads that remain unchanged regardless of the quality of the liquidity of forex market. However, non-variable spreads are usually higher than that of the variable spreads.

Some other brokers provide variable spreads in accordance with the liquidity of market. For such brokers, spreads become tighter when the market liquidity is at good level, however, it widens when the market liquidity falls. There are various brokers who provide different spreads for different forex traders.

Forex traders who are having larger forex accounts or others, who carry out big trades, may get tighter spreads than other traders. Therefore, it is a wise idea to seek for a broker who is offering you the tightest variable spreads without any discrimination.

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