What is spread in Forex?

An investor should understand the basic definitions of market power. Without understanding the index value of the currency, it is impossible to build your own trading strategy. Let's try to answer the most frequently asked questions in a very simple language:

• What is Forex spread?
• What types are known?
• Is it possible to assess the level of market liquidity by the spread value? What are the consequences of its formation?

For example, the currency chart - dollar rate against the Euro shows the current indicator: 1.1324 / 1.1325:

• Value 1.1324 – asking/offer price (ask);
• Value 1.1325 – bid price (bid);

The asking price is an offer at which the buyer is willing to buy a dollar from you. Accordingly, the bid price is the offer that is addressed to you. At this base price, traders are ready to sell the currency in accordance with the stated rate.

Consider a simple example. Say, you are going to buy 10 thousand Euros for dollars at the stated exchange rate of USD/EUR.

The calculation of the transaction is 10 000 * 1.1325 – 11.325 USD. The seller is ready to make you this offer. If you intend to sell dollars to buy euros – use the index in the opposite direction.

The difference between the two values – the bid price and the offer price is called the spread.

According to our offer of the currency pair – the current spread is 0.0001.

Spread is the difference between the price of buying a currency and the price of its sale. This is what the bank earns.

Modern trading platforms try not to charge a commission from the transaction. This increases the impact on the income of the seller or buyer. Their earnings lie in the formation of spreads of currency pairs.

If you are a new investor, always pay attention to the spread value. The lower it is, the higher your margin in the market. The greater will be the profitability of your transactions executed over a certain period of time. Accordingly, the higher the spread value – the greater the amount you will be forced to pay.

Who determines the quotes in the market?

A simple rule – it all depends on the current offer or demand. If traders feel the weakness of the currency, non-investment attractiveness, the market will receive a large number of offers. Price will drop.

With increased demand, liquidity rises sharply, and the price of the currency can show good growth in a short period of time. For example, in 2018, investors could make good money on the currency pair – TRY/USD(Turkish Lira/Euro). The collapse of the currency within a year was more than 25%. When selling the Liras, the investor takes profit. Provided that it was purchased for an even lower cost. The current trader can buy the Lira, justifying his decision with technical or fundamental analysis – the currency will significantly add to the price.

What are the types of spread in the market?

In contrast to the floating spread rate, a fixed value can be used. This is a constant and permanent value. However, depending on some conditions, it can be changed by the broker.

How the size of the spread can vary?

Stability and liquidity of the currency attract a huge number of traders. Everything is quite predictable – the investor wants to invest in a secure and predictable asset. The spread on such currency pairs will not differ by a large range. As a rule, these are a few points that give profit to the broker. But lesser-known exchange rates can show a much wider spread. For example, Scandinavian currencies. Swedish or Norwegian Krona – spread can be calculated by several tens of base points.

The most popular currency pairs are:

Dollar – Euro: the explanation is very simple. The EU countries and the USA provide a global level of production and trade. The regulators are strong enough to keep the currency rate in controlled values.

Japanese yen/ US Dollar or Euro. The Japanese yen is the second largest reserve currency in the world. By far, the most popular currency in Asia. In Forex, it takes second place in the number of transactions.

Third place – British pound. It has good investor confidence and is supported by a strong economy.

The spread can be changed manually. For example, with a large volume of operations, the trader is interested in reducing the brokerage fee. The spread can be manually adjusted to a smaller base point. If the broker indicates his refusal – the trader can simply move to another platform and perform the operation there. There is competition between brokers and the amount of spread.

The valuation of the exchange rate depends on fundamental analysis – traders follow the news briefings and try to predict the demand or supply of a particular currency on the basis of events. The value of the sales price or offer index can be changed in just a few minutes. Any unexpected news or event will give rise or fall of the current exchange rate value.

It all depends on several factors of the trader – his intuition, quick assessment of the current spread and well-constructed strategy.