What is spread, a trader has to get to know before trading starts. This is one of the primary, key concepts to be learned. Forex glossary and training course will be your assistance in that.
In fact, it is the difference between ‘Bid’ and “Ask’, that is, between purchase and selling price at a certain time and for a certain currency. This value is normally measured not in currency units, but in points. Thus it is easier for a trader to compare spreads for different currencies. Besides a plain definition of a spread, it is essential to know spread types too.
At present there are three spread types:
Fixed: its size never changes. Basically, this type of spread is available, if you have a mini or a micro account, which is maintained automatically.
Fixed with Extension: normally is the same, but can extend depending on certain market situations.
Floating: changes in this type of spread regularly and completely depend on the situation on the market at the moment. This spread is not profitable in some strategies, and it can as well significantly hamper their testing.
Knowing what is spread on forex, you have to realize that its value can change all the time. It can be different not only for different instruments, but for one and the same instrument at different times.
The spread size is influenced by:
- Liquidity of a currency pair. The lowest spread is usually peculiar to the most popular instruments, whereas with less popular instruments spreads are much higher. This difference can be significant and vary by several times.
- Transaction volume. If the sum is too large or too small, the spread is bigger. This is due to a high risk with a large sum, and due to overhead expenses in the opposite case.
- Account, currency trader status. Spread size varies also according to the experience of the trader and to the account type chosen by him.
- Tranquility on the market, or the opposite.
When choosing a broker, find out what type of spread it offers, and if its size is beneficial for you personally. To form an opinion about a brokerage it is recommended that you study reviews on brokers.