Frequently Asked Questions About the Forex Spread
A lot of people ask what is the spread and look for information every day regarding trading on the forex market. Due to its high volume and other factors, there is a lot of money to be made in trading forex. But many people who would be traders get lost in the terminology and give up. Below are some of the frequently asked questions regarding one aspect of forex, the spread.
The forex spread is the difference between the bid price, or the price at which you can sell the currency to your broker, and the ask price, or the price at which your broker is willing to sell the currency to you. This difference is typically measured in PIPs.
What is a PIP?
The acronym PIP stands for percentage in points. A PIP is the lowest value of the price as quoted, which in forex is usually the fourth decimal place. In other words, one PIP based on a quote of 4.2102 would equal 0.0001.
Why does the forex spread exist?
On first glance, this difference in the bid and ask prices would seem to be a bad thing. Why would there be a difference in the price you can buy and the price you can sell in an open market? The reason is simple. This spread is how forex brokers make a profit. This spread is essentially their commission for keeping a liquid market available for the trader.
Do I also have to pay a commission?
Typically you do not. There are some brokers who charge a commission, but the practice is not common, and would probably be because the broker is actually a third party broker rather than a market maker.
What can I do to reduce my trading costs?
Not all spreads are created equal. And the same can be said for brokers. To reduce your trading costs, the most effective way would be to find a broker who offers a smaller spread. The smaller the spread, the lower your cost of trading.
Are there any reasons why I wouldn't just use the broker with the lowest spread?
While keeping your trading costs down is important for you to be able to make a profit on your trades, you should use caution before selecting a broker based solely on the lower spread. Be certain the broker is regulated and in a place where you are comfortable those regulations will be enforced. Also be certain that you are getting real time quotes rather than indicative quotes so you are better able to trade effectively. You should be sure that you only trade with reputable brokers you can trust, because you are going to be trusting them with a lot of your money.
The general concept of trading currency is fairly simple, but between the jargon and other complexities you can easily get lost if you aren't careful. Come to Binary.com to help you keep everything straight.