Spreads (Forex)

Just like the equity market, Forex is also quoted by the bid and ask prices where the difference or gap between the bid and ask is termed as the “Spread”. It is important to keep in mind that Forex trading is not commission free. As far as the Forex is taken under consideration, the brokers might come up with the claim that they do not charge any typical brokerage but instead of that, the commission is added in the spread.

In case of forex, the spread is calculated in pips and relates to the difference that is available between the value of the offer and bid. Say for example, if you see the Pound Sterling is posted as 1.7445/48 against the US dollar, it is possible for a forex trader to go and buy Sterling at 1.7450 (which is the offer price) and sell it for 1.7445 (the bid). Now in this case the spread is going to be five pips.

You will find a lot of brokers in the market offering a narrow spread (as low as 2 pip spread) for the currency pairs with high liquidity. This is a common case for currency pairs like the AUD/USD and EUR/USD. In a market where every pip is considered vital, the active or day traders usually find such currency pairs quite attractive. Currency pairs like the one involving the US and Canadian dollar (USD/CAD) comes with less liquidity and normally offers wider spread.

At first you need to make up your mind regarding the currency pairs that you will go for trading and then you should compare the different spreads that are being offered by the brokers for that specific pair. In addition to this, make sure that you are prompting your broker for any sort of special deals or rates if you are a frequent trader.