Trading Articles

What is a Forex Spread?

What is a Forex Spread?

A Forex spread is the difference between the bid price and the ask price of a currency pair. Each Forex company offers different spreads on each of its currency pairs. For example if the EUR/USD pair has a spread of 1.5 pips that mean the trader will be able to buy the EUR/USD pair at 1.5 pips.

There are two types of spreads; Fixed Spreads and Floating Spreads. Fixed spreads mean that the spread offered for a pair does not change no matter the price changes. Usually fixed spreads are higher but they guarantee traders that they will always be betting on the same price, and never worry about the price getting any higher.

Most spreads however are Floating, and that means they can move either up or down based on market movements. Obviously these spreads are less predictable, but they have a chance of becoming even lower and helping the trader earns more. But their initial prices are usually lower which is why many traders prefer them.

Forex companies make their money by taking a small percentage of the spread, so every time a position is opened the company makes a small amount of the spread.

Traders are usually looking for the lowest spreads, especially new comers, or those who can’t invest big money, but a lower spread does not always offer the best option. It is important to remember that the lower the spread the lower the risk, but also the lower the profits. Higher spreads would cost more but the returns would also be more profitable.