HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
Vantage information and reviews
Vantage
85%
XM information and reviews
XM
82%

Decreasing the Exchange Spread: What Does it Mean for Traders?


When you first start looking for potential Forex brokers, you might notice that some of them take commissions for executing every trade while others claim to offer zero-commission services. In most cases this means that, instead of charging commissions, brokers implement so-called exchange spreads, which can help to keep transactional costs to a minimum.

In this article you will learn more about what exchange spreads are, how they are calculated, and whether exchange spreads can be decreased.

What is a spread?

When you trade Forex, you usually do it through an intermediary — a broker, who sells and buys currencies to and from traders. Since traders don’t trade on the Forex market directly but use the services of brokers, there’s a difference between the price at which a broker sells a currency and the price at which a trader buys it. This difference is called a spread.

For example, if you exchange currency at a bank, you will see that the price the bank is offering to sell the currency to you is higher than the price it is ready to pay in order to buy this same currency from you. This difference between the buy and the sell prices is what a spread is, and it’s the profit the bank and brokers who use this type of trading fee get from transactions.

How is a spread different from a commission?

Both traditional commissions and spreads serve the same function — payment for a broker’s services. However, they work quite differently. Spreads are included in the price quoted to traders when they first enter a trade. Spreads can be fixed and flexible. The difference between the two is that flexible spreads can be adjusted by the broker depending on the current market conditions while a fixed spread stays the same regardless of them. Another thing to remember is that you have to pay a spread once per trade.

As for commissions, they’re charged by the broker as an additional cost and aren’t included in the quoted price. Most often, commissions are fixed, meaning that you will have to pay the same amount for low- and high-volume trades. Commissions are also charged twice per trade — both when you enter and exit it.

Which option is better for you depends on your trading style and personal needs. However, most Forex traders prefer using spreads as they can be adjusted and offer more profitable opportunities for traders.

How are currencies quoted?

Trading Forex means buying one currency while selling another. In other words, Forex trading involves trading currency pairs, which are indicated on the charts as USDCAD or EURUSD. The first currency in a pair is called the base currency, while the second one is the quote currency. When a currency pair is quoted, the price you see represents the amount of the quoted currency required to buy one unit of the base currency. For instance, if USDJPY is trading at 134.2600, it means that it will cost you 134.26 Japanese yen to buy $1 U.S. dollar.

How to calculate the spread?

Knowing how the currency pairs are quoted can help you identify how much spread you will have to pay. If you look at the ask and bid prices of a pair, you’ll notice that they’re different. So to calculate the spread you need to subtract the bid price (the sell price) from the ask price (the buy price). So if GBPUSD is trading at 1.2102/1.2105, the spread will be calculated as 1.2105 - 1.2102, equalling to 0.0003 (or 30 points).

Fixed and floating spread

As you already learned, a spread can be fixed or flexible (floating). A fixed spread stays the same even if the market conditions change. This can be an advantage in volatile markets or if a trader is a beginner because the transactional cost stays the same and there’s no danger of it exceeding the profit. However, a fixed spread can be requoted unexpectedly and without notice, which can interfere with your trades.

A floating spread gets adjusted when the market conditions change. It can tighten when there isn’t much action happening on the market and widen when the volatility gets high. A floating spread depends on the levels of supply and demand of currencies, so when you’re expecting a lot of market action (for example, after economic data releases or other major events), you should be prepared for a bigger spread. Trading volatile spreads can be dangerous for beginners as the transactional costs can easily exceed the overall profit from the trades. But they provide more transparency to trading and allow you to see what you’re really paying for.

How to trade with a low spread?

For traders, it’s much more profitable to trade when the spread is tight. The less money you spend on transactional costs, the more money you will be able to invest in your trades, increasing your overall profit. The main reason behind tight spreads is high liquidity. When the market experiences a surge in traded volume, the spread generally stays very tight. If a Forex pair is very popular among traders, it’s easier for them to buy and sell it, turning their purchase into profit. The more a currency pair is traded, the more spread a broker receives. But if trading is going slow and the liquidity is low, a broker won’t get much returns if it keeps the spread amount tight, which causes the increase in the amount of spread potential traders have to pay.

There are several factors contributing to high liquidity on the market:

Sometimes, brokers can also decrease their spreads as a promo offer to encourage traders to be more active on the market. When this happens, you have a chance to take advantage of low spreads without worrying about high volatility or liquidity.

For example, FBS Trade has announced a period of new reduced spreads for all financial instruments, including a 10% spread reduction for EURUSD, a 25% reduction for USDJPY, and an almost 60% reduction for USDCAD. We recommend making the most of this offer while you still can.

Conclusion

A spread is the money a broker charges you for the services it provides. Spreads can be fixed or floating, and both types could be used to your advantage. If your broker charges a floating spread, you can wait until the market enters a period of high liquidity and take advantage of a lower spread. If you’re looking for a broker with better spreads, FBS Trade has several offers that might interest you, from a standard account with a floating 5-point spread and ending with zero spread accounts, depending on your preference. And don’t forget to check out our special (and limited!) promo offer and take advantage of reduced spreads.

#source


RELATED

Forex vs Stocks: Differences, Similarities, and Which to Choose

The forex markets and the stock markets are two popular choices for investors and traders seeking to capitalise on market opportunities. While both markets offer potential for returns...

Should You Use Forex Simulators?

In 2018 we have simulators for everything. Cooking simulators, airplane ones for pilots, simulators for the military - even sexy time simulators...

Swing Trading: a Trading Style for Professionals

The classification of traders might seem sketchy. However, there is a clear division between them based on the period of holding an open position...

Common Knowledge is a Trading Trap

It is no secret that trading can be just as risky as it can be profitable. Many amateur traders dive into it without a proper plan or strategy in place, which costs them lots of money. But an even bigger mistake they can make...

What Is A Crypto Airdrop And How Does It Work?

You might have heard about crypto token airdrops as a popular way to get free cryptocurrency with little to no effort involved. In most cases, the offer of something free...

What are Expert Advisors?

Expert Advisors (EAs) are automated programs that run on the MetaTrader 4 (MT4) or MetaTrader 5 (MT5) trading platforms. They are algorithms that can be used...

Exness now accepts global customers

Having recently expanded our global reach and established a UK-based entity, Exness (UK) Ltd, authorized and regulated by the UK's Financial Conduct...

Options vs Stocks: Differences, Similarities, and Which to Choose

Stocks and options both involve dealing with company shares and equities, but are two different ways of investing. Between the two, stocks are more straightforward and easier to understand...

InvestLite: Bitcoin investment explained

Bitcoin is digital money that does not physically exist. However, there are special registers where information is stored about how many bitcoins someone...

Speculating with CFDs

Typically short-term, speculative trades are generally coupled to major market events such as central bank interest-rate decisions and company results.

Secrets of trading in the Asian session

Practically every trader knows that the particular dynamics of the pricing of financial instruments depends not only on the selected asset, but also...

What Is the S&P 500 and how to trade it?

The Standard & Poor's 500 Index, known by its shorthand as the S&P 500, is arguably the most important stock index in the world. It's made up of 500 companies, including many of the largest...

Silver Trading Guide: How to Trade Silver and Why

Silver, often referred to as "the other precious metal," offers traders and investors a unique opportunity to engage in commodity trading. In this comprehensive guide, we will explore the world of silver trading...

Is EOS A Good Investment? Top Altcoin Insights For 2021

The cryptocurrency market is filled with innovation and ambition, where projects aim not just to be platforms for developers to build on, but full-scale ecosystems that can...

How to stake Ethereum

Ethereum is switching into a proof-of-stake consensus to allow the network to achieve scalability. Ethereum staking is when people lock up Ether (ETH) for a given time...

How to Get into Online Metal Trading with IronFX?

The most popular precious metals in metals trading are gold and silver. The latter is strongly linked to the main currencies and the world economy as a whole. Precious metals have long been...

Best choice for trading cryptocurrencies

There are a least in 5 different ways you can invest in cryptocurrencies nowadays. They are: Bitcoin ATMs, Bitcoin futures, trading cryptocurrency...

VeChain: Is It on the Verge of Massive Growth?

Asia continues to be at the forefront of blockchain development, and VeChain is one of the brightest crypto projects in the region. There are different opinions...

Ethereum trading in 2020: step-by-step guide

The Ethereum cryptocurrency is an open software platform based on blockchain technology that allows developers to create and release decentralized applications...

The Modern Day Trader's Guide: Understanding Time Commitment and Strategies in 2024

As the curtain closes on 2023, with the S&P 500 signaling a moderate gain, the focus shifts to the landscape of day trading in 2024. Day trading, a practice where traders capitalize on intraday...

FP Markets information and reviews
FP Markets
81%
RoboForex information and reviews
RoboForex
77%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Exness information and reviews
Exness
76%
Just2Trade information and reviews
Just2Trade
76%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.