Saturday, 04 July 2020


F Forex Course

The Spread and cost per operation

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INTRODUCTION TO FOREX Sure you're tiresome to see or hear that forex brokers do not charge commission... well, some yes, some that d not. Increasingly, those who are going to collect a commission and offer flexible spread and not fixed spread. What did you say? Spread? Let me explain what is the spread....

The trading price of a currency pair is expressed by the pair (two names) and the price (two values):

Currency Base/Quoted currency | Price Bid / Price Ask

The Bid is the highest price at which the market is willing to buy (hence also known as bid price). So is the price at which you will enter if you sell. The Ask is the lowest price at which the market is willing to sell (hence also known as ask price). It will therefore be the price at which you will enter if you buy. Normally you will see the Bid price in the graph, this is the price at which the transaction will enter if you sell. The Ask price is the price at which you will enter if you buy. The difference between Bid / ask is the spread. Thus the spread is expressed in points. Example: You open an order in EUR/USD when you quote is 1.5756/1.5758. As you go to buy , you will enter 1.5758 , which is the price at which the market is willing to sell. Upon entering you see that your position is with -2 points . This is because out of the position of buying what you do will be sold, so the starting price is 1.5756 and your entry price was 1.5758. You paid 2 point spread. Later the price will 1.5788 (that you see on the graph), the quote is 1.5788/1.5790 and close the transaction. When you close the purchase transaction you do is sell so the closing price is 1.5788. You earn 30 points (price less price input output). As you can see has entered at the Ask price and left at the Bid price, you have paid this difference to the broker. Similarly if the operation is for sale, you enter the bid price and You go out the ask price, paying the spread. Therefore, the spread represents the cost per transaction. The spread is something natural in the market and is not fixed. Brokers that do not charge Commission charged a number of points which added permanently to the natural spread of the market, for example can increase the spread always adding two points to the price of the EUR/USD pair quote. The brokers that have flexible spreads and charge Commission should add, as the cost of operation, the Commission and the spread, although in this case there will be occasions in which the spread will be 0. Brokers that do not charge Commission are often called "fixed spread" that maintain a fixed spread most of the time. In this image you can see an example of spread of 3 points in EUR/USD. [gallery ids="1454"] As we saw in the previous lesson, if you made the transaction with the mini lot, a cost of 2 points in an operation in the EUR/USD means 2 USD. What else you should know the spread? You'll find numerous discussions on the extent of spread, if my broker has increased the spread to 80 points when there was such news, if you read the fine print, when a fixed spread broker says 2 pips on EUR / USD is marked with an asterisk and the asterisk when you read says: Under normal market conditions. And is that the moments of high volatility, in which market very fast movements occur, and usually coincide with publication of news of great importance to the market, spreads often expand theories why this happens there are many, if is lawful or not, etc. I will not enter the debate it would be endless. From my point of view a low / moderate widening of spreads at the moment is almost inevitable and natural, an exorbitant expansion may indicate low liquidity of the broker should consider changing broker (you can read the operation sequence of a broker to see the why spread increases at certain times is normal and natural).  

Next lesson: 5. Types of Orders in Forex Source:

Author: ForexmanWebsite: http://www.asdforex.comEmail: This email address is being protected from spambots. You need JavaScript enabled to view it.
ASDForex manager and professional trader since 2008. I am also manager where you can view the services that I give
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