Day Trading Spread

One of the fundamental items that you will hear talked about in the Forex trading community is the amount of the "spread". The spread is the difference between the "bid" and "ask" prices, which are the prices you can "buy" a currency at and you "sell" a currency at. The spread varies depending on your broker and on the currencies that you are trading, so it is always worth checking on it before opening an account, and again from time to time in case it changes.

An example will make the idea of the spread clearer. Say you wanted to trade the EUR/USD, the euro against the US dollar combination. This is heavily traded and a competitive pairing, so typically the spread is low or "tight". The quote may be 1.3699/1.3701. This means that one euro, the base currency as it is the first one of the pair, can buy $1.3699, but you need $1.3701 if you want to buy that euro back.

In this case the spread is two pips (except when trading the yen, a "pip" is 0.0001). As it is such a small fraction, you may think that it does not amount to much, but when you consider that Forex is commonly traded in "lots" of 100,000 currency units then you should realize that it can make a difference.

Unlike stockbrokers, Forex brokers do not usually charge a commission, so the spread is the way that the dealer charges a fee for his services. Many brokers will offer a fixed number of pips as the spread for any particular currency pair, with the most popular trades attracting the lowest spreads as the brokers vie for your custom.

Just for the record, some Forex dealers offer a variable spread, and the amount of this changes according to market conditions – so sometimes it will be tighter than the fixed amount, and sometimes more. In fact, some brokers even offer to let you deal directly on prices streamed from participating banks, rather than simply acting as an intermediary and setting the prices ("making the market") for you.

You should certainly be interested in how large a spread different brokers offer on the currency pairs that you want to trade. When you are trading Forex you are leveraging your capital, sometimes as much as 100 to 1 or even 400 to 1, so a pip difference between brokers can mount up, particularly if you're making several trades a day. It might even make the difference between a profit or a loss on your account.

One thing you can do about it is to have at least two Forex trading accounts, so that you can compare competitively the available spreads, particularly if you are considering trading a currency pair which you do not usually trade. But you should also be aware that the spread, while important, is not the only factor that should be taken into account when choosing your broker. Ease of using their trading software, speed of execution, customer service and other factors all figure into choosing the Forex broker who will give you the most profitable platform.

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