What Are Forex Spreads : Definition, Types and How to Measure it

In general, the spread is the difference between the price of the highest buy order and the lowest sell order on the exchange market. The value of a crypto asset is the average of all spreads on all crypto asset exchanges in the world. Trading occurs when there are transactions between sellers and buyers.

Trading occurs when there are transactions between sellers and buyers. When transacting, sellers often set high prices to gain profit, while buyers will offer them at low prices. This is what causes the spread. In other words, the spread is the difference between the bid price and the bid price that occurs in the market.

The size of the spread is different for each pair, even the spread given can differ from one forex broker to another. The spread is the trader’s transaction fee each time an order is placed. Spread is divided into two, namely floating spread and fixed spread.

Forex brokers can use fixed spreads, which are spreads that do not change under any market conditions. Another spread is a floating spread system that changes depending on market conditions.

What Are Forex Spreads ?

In simple terms, the spread is the value of the difference or margin between the buying price (ask) and the selling price (bid) of a currency between a trader and a broker. This fee is charged by brokers to traders for the transactions they make, not charged separately.

This is where the broker gets profit. Naturally, because when you use the services of a broker to make a profit, then there must be a fee or commission that you have to bear.

Don’t be easily tempted by brokers who provide commission-free services, because it is likely that the fees they charge are in the spread. Always study in detail the costs that you will incur.

Spread Type

In general, there are two types of forex spreads, namely, fixed spreads and floating spreads. Each spread has its own characteristics.

As the name suggests, the fixed spread remains the same even if market conditions change – whether it is volatile or stable – the value you agree with the broker of your choice will not be affected.

For those of you who have small capital, fixed spread is an attractive option, because the average broker does not post large numbers. Another advantage of trading with a fixed spread is that transaction costs are more predictable. Since the numbers are fixed, you already know how much you will pay when you start trading.

With a fixed spread, you can trade more calmly and can measure potential profits and losses with more certainty because you already know the spread.

Conversely, the floating spread varies according to the bid and ask prices of currency pairs. Spreads will follow the supply and demand of currencies and market volatility. The spread value can be very low, starting from 0, pips, depending on the pair and related broker.

For example, when you want to buy EUR/USD with a spread of 2 pips, but when you want to press the ‘buy’ button, you don’t know that the NFP report has just been released and the spread can quickly widen to 15 pips.

Therefore, for those of you who choose a floating spread, make it a habit to always be alert with economic news.

How to Measure Spreads

At a legal and reliable broker, the spread is measured in pips – the smallest unit of movement in the price of a currency pair. For most currency pairs, one pip equals 0.0001.

For example, for the EUR/USD currency pair, if the bid price is 1.5735 and the ask price is 1.5737, then the spread price is 1.5735/37 or 2 pips.

The advantages and disadvantages of fixed spreads

Advantages:

Difference

In the initial agreement with the customer, the broker has provided the difference between ask and bid. And if there is a change in value, it must be accompanied by strong reasons, such as price developments or too high volatility.

Stable value

Because it has a stable value, there is no need for traders to worry too much or object because it has been known from the start.

Money management

Fixed spread requires stable costs so that money management trading is more consistent.

disadvantages :

Cost

A commission system with a larger value can occur when compared to those that often change according to the central market price.

The advantages and disadvantages of floating spreads

The advantages of floating spreads

Spread narrowing opportunities

Referring to market fluctuations, active trading with floating spreads means that market liquidity is high and spreads will narrow.

Disadvantages of floating spreads

Brokerage commission

Because it was not confirmed from the start, forex players could not know for sure the broker’s commission share.

Risk of increasing spreads

If a major event occurs, there is a possibility that the spread will increase from the original price, so that traders are unable to get the maximum profit.

However, not all brokers or brokers implement a low commission or spread system. Here are some ways to find a broker with the lowest spread:

  • Choose a company with a high rating and positive reviews.
  • Prioritizing experienced and professional brokers, who prioritize the success of the players.
  • Ensuring formality and legality.

For experienced forex traders, floating spreads are even more attractive. Increased volatility is a moment to look forward to because not every time you can make a profit in a short time.

Different Spreads for Each Trader

So what kind of spread is right for you?

There is no definite answer to this question because it depends on your needs. Get to know what type of trader you are, what is your trading style, and from there you can choose the spread that suits you.

However, for those of you who are just starting your Forex trading career, fixed spread can be a safe choice. Meanwhile, floating spreads are suitable for those of you who are experienced.

If you are relying on short moves or short timeframes then traders tend to prefer floating spreads due to lower initial values. Conversely, traders with long-term analysis will choose fixed spreads for more stable trading conditions and results.

Check out the full range of Finex spreads for each account with their respective technical descriptions.