Understanding spreads in Forex trading
Forex trading has earned popularity in the last years. With small initial deposits and very low commissions, it’s an interesting market for those trying to increase their profit and make a more sizeable income.
But there are a few things to learn before getting started in the world of exchanging currency. And Among those things, we must first mention spreads.
Spreads have a huge impact on the potential of a trade to be successful, and all traders should always consider them when making deals in the Forex market. All trading strategies have to consider the spreads if they are to be profitable.
And the lowest the spread, the more chances of making money in the market. So, as a trader, you should be looking for the lowest spread forex broker.
But, before we even get started with a broker, let’s try to understand how everything works in the Forex market.
What is spread in Forex trading?
The best way to put it is this: a spread is a difference between the bid price and the asking price of a currency. Or in other words, the difference between the selling price and the buying price on the base currency in a currency pair.
It’s important to understand that always the buying price is higher than the selling price, and this difference is what the spread is.
Now, how is that measured?
Well using something called “pips”. Because the difference between these prices is usually really small, for example, 0.0003, a way to simplify this is to say 3 pips.
If there is another decimal, it’s even possible to say 0.6 pips, which basically is 0.00006.
Once we understand what spreads are, it’s easy to see it as a commission to the broker. Many offer what they call “o% commissions”, but the truth is that there is always a cost for any trade done in the forex market. And that’s the spread.
Low spread or high spread?
If we say that a spread is the part of the transaction that goes to the broker, kind of like a commission, you can easily imagine that a high spread is not very convenient.
Finding brokers that offer lower spreads, means more chances to make a decent profit.
But, why?
Major currencies have usually low spreads, most people trade in those and they have less volatility and higher liquidity. However, more exotic currency pairs may present higher spreads, which is normal and means higher volatility and less liquidity.
How to choose a Forex broker with low spreads?
Choosing the right broker that offers not only the currency pairs you want to trade with, but also the lowest spreads is very important to be a successful trader in the Forex market.
However, traders should not be just tempted by low commissions and dubious deals. Their personal information as well as the security of their money must always be a priority when choosing a broker.
So how do you know if your broker is safe? Check out the regulations they abide by.
Another consideration when choosing a broker and trying to grow your income is to check their withdrawal scheme, to make sure you don’t have to wait long times to get your money.
Some traders make it a priority of having quality customer service. It is true that when you need them you have to be able to contact them and get the answers you’re looking for.
Additionally, checking the brokers’ reputation online with reviews of users, and even trying a demo account to ensure the online platform satisfies your needs, are considerations that all traders should keep in mind.
