Understanding Spreads in Forex Trading - Money Soldiers
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Understanding Spreads in Forex Trading

Among the many things that you need to understand about forex trading is the concept of spread.  It is a concept that is central to the manner in which forex brokers make money and profits and therefore it is essential that you get a good grasp of forex spreads in order to choose the right forex broker and manage your trades, too.

What is Forex Spread?

The spread in forex trading language is the difference in price between the rate at which a currency is being sold and the rate at which it is being bought at the same time.  It is obvious that someone who is trying to sell a particular currency will try and do so at the highest price.  Those who are looking to buy the currency will try and minimize the rate that they need to give for the same.  The difference in the price between these two rates that a forex broker offers is called the spread and this forms the basis of the profit that the brokers earn.  This is also why you do not see a commission charged on the forex trades that you place on the forex platforms.

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Different Types of Forex Spreads

There are essentially two kinds of spreads that are offered in the market.  In markets.com review you can read that this broker for example offers fixed spreads, but there are others that offer variable forex spreads.  A fixed spread is defined for a specific currency and the difference between the price at which you can buy and sell the currency remains the same through the defined period.  While the selling price and the buying price of the currency may change based on the market the difference between the two remains constant.  It should be noted that a forex broker offering fixed spreads defines this fixed spread for a currency pair.

When a forex broker offers variable forex spreads, it means that the difference between the selling rate of a currency and the buying rate can differ based on the market scenario.  This can fluctuate to some extent even during a day.  During high traffic and volume times, the spreads offered are lower than those offered at times when the volumes of trading are lower.  This is why it is recommended that the best time to trade in the forex markets are the times when the trading sessions of two time zones overlap.

Which is Better – Fixed Spread or Variable Spread?

If there was a clear cut choice with regards to the spread that is better, no forex broker would actually offer the other since all traders would prefer one.  Each of the options has its advantages and disadvantages.  While fixed spreads cannot bring out any surprises at the end of the day, variable spreads are typically lower than the fixed spreads offered at a particular time.  However, variable spreads can fluctuate and become higher than what you may have planned for.

Jesse Fin
 

Jesse worked as a journalist for a large tv station in Korea in her past life. She now works full time at home as a blogger and loves to help her friends manage their personal budgets.

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Lance McDonald - March 15, 2013

I have never heard of forex trading. Learn something new everyday. Thanks for the information.

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    Arnel Ariate - March 18, 2013

    I have never heard of Lance McDonald. Meet someone new everyday. Thank you for the visit.

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forex trader - March 23, 2013

Neteller is an extremely popular and secure E-Wallet that allows you to fund your Capital One Forex live account. You have the option to fund using multiple currencies using many different funding methods including all major credit cards.

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    Arnel Ariate - March 23, 2013

    Nice to know about Neteller.

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forextrading - March 29, 2013

Usually it involves an official action to change the internal economic policy for the purpose of correcting a distortion in the balance of payments or the official currency rate.

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    Arnel Ariate - March 31, 2013

    That’s interesting.

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ecn forex broker - April 7, 2013

Hedging – Protection from fluctuating currency pairs which is derived from trading goods and services

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    Arnel Ariate - April 9, 2013

    We learned something new today: hedging. 🙂

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exchange e money - August 26, 2013

Thanks for clearing out the confusion among fixed and variable spread. One must know about these terms in detail before going for any forex activity. Keep helping.

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