What
is a spread?
The
difference between the bid and ask price is called the spread, in the
previous example you can buy at the offer price of 1.13397 and sell
at the bid price of 1.13389. For the difference between two prices
are 0.8 pips. The major currencies spreads will vary based on the
quality of the currency pair, the tighter the spread the more liquid
the currency pair. Conversely the wider the spread, the lesser the
liquidity of the currency pair.
The
brokerage’s profit is also included into the spread. Brokerages
normally do not charge traders for monthly fee for operating, direct
transaction charges for making trades; instead brokerage charges
traders by adjusting the bid and offer price of currency pairs that
are traded.
Brokerages
normally charges the spread in 2 ways.
-
Variable spreads, which are spreads that don’t have the same constant value. A variable spread will condense and widen as market conditions and liquidity change.
-
Fixed spread, which spreads are fixed for currency pairs and the brokerage will update you when there’s a change in spread.
Almost
all brokerages will boast a minimum spread of around 1 to 2 pips.
Note that it is only the lowest, meaning it doesn’t happen all the
time, maybe only once in a while. Always start a demo account with
the brokerage to sense how the spread is before committing to a live
account. Look for a brokerage with better spread as spread will erode
the profit of your trade.
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