Forex Spreads

When you start trading in the forex market, you will probably hear the term "spread". If you are a beginner, you probably don't know what it means, or why you want this spread to be as small as possible. Here is the truth:

A spread is the difference between the buying and selling price of a currency pair at a given time. Usually your broker gives you two rates: a buying rate and a selling rate. The buying rate is always higher than the selling rate, so if you buy and sell without price movement, you lose.

Good forex brokers will give you a spread of 3 pips or less for the major currencies (a pip is a "forex unit" of the exchange rate, usually a ten thousandth of the rate) during normal market conditions. When the market becomes volatile (which happens after important announcements, like interest rate decisions) the spread usually grows. Bad forex brokers give spreads of 5 pips or more on major currencies.

The spread is just another form of commission. Most brokers don't take a commission on trades (if your broker does, consider switching), but they have this spread. It means you start from a losing position right after you enter a trade, and you need the exchange rate to move some pips in your direction just to break even.

This is the reason the spread is low on the major currencies and high on others. The major currencies have a high trading volume, so many people are buying and selling on the same price, and the broker profits from the spread. The more exotic currencies have a lower volume, so the brokers raise the spreads to make more money out of them.

Remember - the spread is a hidden commission. Don't compromise for a spread of more than 3 pips on the major currencies under normal market conditions.

Yours,
Nadav

nadavs