Forex is attracting new traders every day. Since this method of trading is still new to many people, they are confused about various aspects. There are many things to learn before diving into the vast world of FX.
Many beginners ask, what is spread in Forex? You might have heard this term on a broker’s website or in a trading book. That is because the concept of spreads exists in traditional trading as well, but it is a bit different.
This article will answer all your questions related to spreads so that you can make better trading decisions.
What is Spread in Forex?
In simple words, the spread is the difference between a broker’s sell rat and buy rate for trading currencies. Depending on the currency and brokerage company’s conditions, spreads can be wider or narrower.
However, most brokers ask for wider spreads, regardless of the currency. This is how they make their earnings from their clients. It usually happens when you trade with a “no-commission” brokerage house.
It is considered the fee for completing transactions.
Like all other terminologies, Spreads also has a unit. It is measured in pips, which is the smallest unit of a currency pair. With that said, let’s look at different types of spread in forex.
- Types of Spread in Forex
Spreads are divided into two types, depending on the broker you choose. These are:
- Fixed Spreads
- Floating SpreadsRead More About: sdedc
- Fixed Spreads
Fixed Spreads are mentioned in the broker’s conditions. This type does not change in any given situation. It means that no matter the volatility of the Forex Market, Fixed Spreads remain the same.
The main benefit of such spreads is that you do not have to worry whether the market is volatile or not. However, some users can also be misled with wrong information. And after trades, they will face a bigger loss than expected.
- Floating Spreads
As the name suggests, these spreads are constantly changing. That is due to the fluctuating currency pairs prices and market volatility. These are also called Variable Spreads in Forex.
Floating Spreads’ biggest benefit is that it offers more transparency in pricing. Plus, you can strategize better trades considering the market’s condition.
But, these are not suitable for beginners as they are not experienced in understanding the Forex markets.
- How to Calculate Spreads in Forex?
Generally, brokerage companies mention their spreads on their websites. This way, you can easily calculate how much they will cost for you. It is also recommended to consider whether they are fixed or variable.
Firstly, you have to find out your value. The spreads are calculated by The value per pip and The Number of Lots.
For instance, if you are trading a 10k EUR/USD lot, you would have a total of 0.00006 (0.6 pips) x 10,000 (10k lot) = $0.6.
Using this technique, you can calculate the total spreads considering your requirements.
There’s so much to learn in Forex Trading before being a part of it. And, the best place to start is with Spreads in Forex. By going through this article, you will understand the concept, types, and how you can calculate spreads.
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