Forex Spreads and its Role in Improving Trade Outcomes

Spreads are fundamental part of any financial market. Every kind of market has spreads and so does the foreign exchange.

Currencies involved in the Forex market have their own sets of prices. Normally, for a pair of currency, there are two prices.

These two prices will help traders determine the spreads and will be useful to their trading outcomes.

How to define spread to improve results

Basically, a spread is the difference between the ask price and the bid price of a currency. An ask price is used when traders buy the currency while the bid price is for selling the currency. The difference derived from these two prices formed the spread, which is normally very small.

Spreads might be small in value but do not underestimate its importance as it is one of the most useful things traders should check when choosing Forex broker as it shows the amount of commission a broker received from the trade.

To give a figurative example using the EUR/USD pair, say the buy price is at 1.35641 and the sell price is at 1.35628, traders will get 0.00013 as a result when they subtract it and will serve as the spread. This spread, 0.00014 can help you identify the pips, which are the last two digits but will be separated by a period, 1.4. The higher the spread you have, the higher the impact it has on your losses of profit.

You can have minimal spread by trading only during the most favorable hours when there is an influx of buyers and sellers in the market. Normally, market makers narrow their spreads as the number of buyers and sellers of a given currency pair piles up. Or just avoid investing in thinly traded currencies where spreads are expected to be wider.