What does spread mean in forex

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spread mean in forex
spread mean in forex

What does spread mean in forex

 

Most novice traders have no idea what costs to expect when trading Forex or CFDs, for example. Terms such as spreads, order fees, rollover or swaps are used here. Since one has little to do with these terms in everyday life, we would like to explain to you below what does spread mean in forex  and what forex trading actually costs.

Contents:

 

  • trading costs
  • What are spreads?
  • How do spreads work?
  • types of spreads
  • Commissions & Order Fees
  • Swaps & Interest
  • Other Fees
  • Optional trading costs
  • Conclusion

Trading costs

A distinction can be made here between fixed costs such as spreads or commissions, which are actually always incurred when trading, and optional costs for additional services such as news feeds, extended charting packages or external trading software. With every trade you place with your broker, 99% of the time the spreads occur. Some brokers (mostly ECN or STP brokers) charge a fixed order fee in addition to the spread, which depends on the volume traded. Many traders, especially beginners, often underestimate these costs, or at least are not really aware of them. Costs such as spreads or commissions can make the difference between success and failure in trading.

What exactly are spreads?

Spreads are fees charged by the broker on each trade. Simply put, the spread is the difference between the bid and the ask price. Another term is therefore also bid-ask spread. This fee is always incurred by the trader, regardless of whether the trade is successful or not.

How exactly do spreads work?

That’s relatively easy. The broker gives its customers two rates for each tradable instrument, such as a currency pair like the EUR/USD. Once the buying price (bid price) and once the selling price (ask price). The difference between these two rates is the spread and thus represents the broker’s source of income.

 Different types of spreads

Depending on the broker, there are 2 different types of spreads. A distinction is made here between variable and fixed spreads, whereby, as the name suggests, the variable spreads are variable and can fluctuate and the fixed spreads are fixed, i.e. fixed.

Variable spreads

This is the most common variant among brokers. Brokers usually offer variable spreads, especially in very volatile markets. Good and fast order execution is all the more important here, since the spread can change while the order is being executed. So it may well be that a broker specifies a spread of 1 pip in EUR/USD, which is also available in quiet markets. In hectic market phases, however, the broker adjusts his spread to market conditions and trading is only possible with a spread of 2 or 3 pips. This phenomenon is called spread widening and is not uncommon for some brokers. We therefore recommend our forex broker comparison to find a suitable forex broker that offers variable but good spreads for your trading. After all, spreads that are too high reduce your profit.

Fixed spreads

In contrast to variable spreads, there are also brokers who offer their customers fixed spreads on some or all instruments. The advantage here is of course that the spreads are always the same regardless of the market situation. However, the broker often factors in possible market fluctuations, so that the spreads are generally somewhat higher. In hectic market phases, there can also be increased requests. However, this does not have to be the case with every broker. Here, too, we have clearly compared all brokers with fixed spreads for you.

Commissions & Order Fees

Some brokers charge an order fee in addition to the spread. In most cases, these are ECN or STP brokers who only pass on their customers’ orders to their affiliated banks or liquidity providers and therefore earn little or nothing at all from the spread. Therefore, a commission is charged here, which is due for each trade depending on the order volume.

Variable Commission

Here the commission is calculated depending on the volume of the order. For example, if the broker charges USD 60 per million USD traded, this means that there is a commission of USD 6 per lot (since 1 lot equals 100,000 units of the base currency). With variable commissions, the larger the order volume, the higher the commissions. Some brokers also have scales based on trade volume. For example, the commissions decrease from a certain order volume. In this way, traders who trade high volumes can of course reduce their fees.

 

Fixed commissions

Some brokers such as WH Self invest also charge a fixed fee in addition to the spread, which is independent of the order size. So the volume of the trade doesn’t matter here. Of course, this model is particularly interesting for traders who trade larger volumes. For traders with smaller accounts, this price model is of course rather disadvantageous.

 

Swaps and Interest Fees

If you want to hold your trades overnight, there may be additional fees when trading forex or CFDs. These fees vary from broker to broker and also depend on the instrument being traded and the trading direction (long or short). These costs are called swaps or rollover fees. Each market has a certain interest rate for positions held overnight. Depending on the market and the direction of the trade, it is also possible that the trader will be credited with interest for holding the position overnight.

 

Other possible fees

In addition to the normal costs of forex trading such as spreads or commissions, other fees may also apply. These include, among other things:

 

  • Platform Fees
  • Course Supply Fees
  • inactivity fee
  • quarterly fee
  • Telephone order costs

Except for the fees for telephone orders, these fees do not occur with most Forex and CFD brokers. To be on the safe side, however, we recommend that you check with your preferred broker in advance whether some of the fees mentioned may apply.

Optional costs

Here, for example, costs for additional software such as news or data feeds should be mentioned. Especially if your trading strategy is also based on news or global events, additional data providers are often necessary to provide you with the data you need. Depending on the provider, different fees may apply for this, which must be taken into account. But also costs for Forex signal providers or additional services such as Auto chartist, Milani’s or VPS Server for the automated operation of trading strategies fall under this point. But you should also make a good comparison here, because some brokers make many of the tools mentioned above available to their customers free of charge from a certain minimum deposit.

 

Conclusion

As you can see, there are quite a few cost factors to consider when trading currencies or CFDs. Spreads, commissions and rollover fees are probably the most important for most traders. If you know your own strategy and know which products you need to keep the costs as low as possible, you can start looking for a suitable broker. Because every euro you pay less in fees increases your trading profit and can ultimately make the difference between success and failure.

Read More:

What Are The Pros And Cons Of Forex Trading?

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