In forex trading, the term “spread” refers to the difference between the bid price and the ask price of a currency pair. The bid price is the price at which a trader can sell a currency pair, while the ask price is the price at which a trader can buy the same currency pair. The spread is essentially the cost of the trade and represents the broker’s profit.
Here’s a breakdown of the key components:
1. Bid Price: The price at which the market (or your broker) will buy a specific currency pair from you.
2. Ask Price: The price at which the market (or your broker) will sell a specific currency pair to you.
3. Spread: The difference between the bid and ask prices. It is measured in pips (percentage in points), which is the smallest price move that a given exchange rate can make based on market convention.
The spread can be influenced by various factors, including market liquidity, trading hours, and overall market conditions. Major currency pairs, such as EUR/USD, tend to have lower spreads because they are more liquid and traded more frequently. On the other hand, less traded or exotic currency pairs may have higher spreads.
Traders need to consider the spread when entering and exiting trades because it directly affects the overall cost of the transaction. Tighter spreads are generally preferred by traders as they reduce the cost of trading, making it easier for a trade to become profitable. However, it’s essential to note that the spread is just one factor among many that traders should consider when evaluating the overall trading conditions offered by a broker.
Example – On the EUR/USD, the bid price is 1.34568 and the ask price is 1.34588..
• If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568.
• If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588.