Category: 
February 24, 2009
What is a spread?
In margin forex trading, there are two prices for each currency pair, a “bid” (or sell) price and an “ask” (or buy) price. The bid price is the rate at which traders can sell to the executing firm, while the ask price is the rate at which traders can buy from the executing firm.
For example, when you see the price quote of EUR/USD is 1.2881/1.2884 as in the above picture, the bid is 1.2881 whereas the ask is 1.2884. That means traders looking to sell must do so at 1.2881, those looking to buy must do so at 1.2884.
The difference between the bid and ask price is the spread, which constitutes the cost of the trade. In fact, all traded instruments - stocks, futures, currencies, bonds, etc. - have spread. If a trader buys at 1.2884 and then sells immediately, there is a 3-point loss incurred. The trader will need to wait for the market to move 3 points in favour of his/her position in order to break even. If the market moves 4 points in your favour, he/she starts to profit.
Many online trading firms like to promote margin forex trading as an almost cost-free instrument - commission free, no service charge, no hidden cost, etc. Traders should know that spread is the cost of trading, and in fact, it also represents the main source of revenue for the market maker, i.e. the forex trading company. The spread may appear to be a minuscule expense, but once you add up the cost of all of the trades, you will find it can eat away quite a portion of your account or your profit. If you check the price tag of a T-shirt before you buy it, do the same thing when you trade forex, look into the spread before you decide to trade. Your trade needs to surmount the spread (the cost) before it profits.
Know your expense: the spread
Spread is the cost to a trader. On the other hand, it is a revenue source of the firm who executes the trade. In the foreign exchange market, the spread can vary a lot depending on the executing firm and the parties involve. Inter-bank foreign exchange can have spread as tight as 1-2 pips, while the bank can widen the spread to 30-40 pips when dealing with individual customers. If you check out the spread of those small exchange shops nearby the tourists’ sights, you may find the spread can go up to 400 to 600 pips.
Thanks to keen market competition, the spread of online forex trading is getting tighter in the past few years. For major online forex companies, their spreads are essentially the same. The table shows the typical spread of four major currencies of online forex trading at the time being:
Pair Spread
EUR/USD 2-3 pips
USD/JPY 3-4 pips
USD/CHF 5 pips
GBP/USD 5 pips
It is important for a trader to find the tightest spread as possible, but anything that is far lower than the typical spread is skeptical. The spread is the main source of revenue of a forex trading firm, if the firm cannot earn enough from the spread, there maybe some other hidden cost in the transaction.
Another point to note is that many market makers often widen the spread when market conditions become more volatile, thus increasing the cost of trading. For instance, if an economic number comes out that is off expectations, thereby creating a flood of buyers or sellers, the market maker may often widen the spread to restore the balance between buyers and sellers. As a result, traders should inquire about the execution practices of their clearing firm; firms with poor execution of orders and a tendency to widen spreads will ultimately result in higher trading costs for the end user.
Actionforex.com
http://www.articlesbase.com/currency-trading-articles/spreads-in-forex-45708.html
Horaayy..there are 3 comment(s) for me so far ;)
A "pip" is a fraction of a unit of currency. For instance, the current level of the dollar versus the British pound is $1.9671 per pound. The $0.0001 is called a pip. A forex broker will make a quote $1.9670 bid and $1.9672 offered. In this case, the spread is 2 pips (i.e., $0.0002). If you want to buy pounds, you must pay $1.9672 dollars. If you want to sell pounds, you will receive $1.9670.
So, if you trade frequently, you would prefer a narrow spread, like the one above, to a spread of, say, $1.9500 bid and $1.9700 offered. In the latter case, you need the $/pound rate to move a lot just to break even.
References :
When you excute a live postition the broker will charge you 2-4 pips . You can trading in the following platform for try ,you will know everthing.
You can open an free Marketiva forex \gold\fund\indexs online trading account , with $5 reward and $20000 virtrual fund for practice .Just click the following link to open an account.
http://www-forex.spaces.live.com
References :
how do forex brokers charge traders with pip spreads?
i know that the less pip spreads a forex broker offers the better. but why? how do they make money by offering more or less pip spreads?
thanks in advance.