How Does a Forex Spread Work? Here’s a Beginner’s Guide

If you’ve traded stocks in the past, you have noticed that trading Forex doesn’t work the same way. To be a successful forex trader, you must understand how the spread works.

It isn’t as complicated as it might sound. If you’re here it means that you want to take your Forex trade game to the next level. And, know that you have to understand the Forex spread down to a science.

This might come to you as a surprise but understanding the spread will do miracles for your trading.

Want to improve your forex trading? Read on to learn how!

Forex Spread: The Beginners Guide

If you’ve been investing for a while, you’ve heard all about the spread before. What is a spread? Is it the same in Forex?

A spread is the difference in value between the bid and ask of an asset or security. In Forex, it refers to the difference between the bid and ask for the currency pair. In stocks, it is the difference between the strike price and market value.

As a trader, you’re always looking for the narrower spread. But, we know there’s more to the spread than that. It can make or break your trade.

How Does a Spread Work?

The spread works differently in Forex than other investments. In this market, the difference between the currency pairs being traded will be your spread. Yet, that narrow spread can become wider.

Forex brokers need to make money. So they use your spread to charge you their fees. Your broker may be charging you between 1 to 2 pips.

Remember that a pip is the smallest price movement in the currency pair. Your broker will deduct the pips they’re charging to the bid while adding them to the ask price. They’ll use this to cover their operational expenses and earn profits.

An example would be when a broker receives a trade for the EUR/USD pair. The bid and ask rate is 1.2419 and 1.2420. The broker will add 2 pips to this spread.

This means the final bid and ask price will be 1.2418 and 1.2421. The 0.0002 earned by the broker in this trade might seem small. But, when you look at how many trades the market broker works daily the number adds up.

You should check what your broker is charging you. Then you’ll have a clearer idea of how narrow or wide are the spreads on your trades. Don’t forget that your spread can make or break your trading.

Should You Care About How the Spread Works?

Yes, you should care about how the forex spread works. Your spreads can help you take your account to the next level. You should always aim for narrow spreads to make the higher profits.

You’ve to consider how many pips your broker charges you. Because they’ll add those pips to your spread. Unless your broker offers you low spreads and charges you a commission.

When you set your spreads, you’ve to set them according to the market movement. If you keep your spreads low and follow the market, you’ll make more profitable trades and grow your account in no time.

Want to take your forex trading game to the next level? Check out our blog post to learn smart forex trading strategies to make more profitable trades.

This article was put together by our in-house financial experts.