FxBrokerReviews.org – Investing in the foreign exchange market involves the trading of one currency in exchange for another. This exchange takes place at an exchange rate, which depends on various market as well as geopolitical factors.
The currency is always traded in pairs known as currency pairs and is quoted in terms of their price in another currency. The difference between the exchange rate at which the currency pair is sold and the rate at which it is bought is known as the forex spread.
Spreads in forex are a way for forex brokers to earn revenue. In simple terms, it is the difference between the bid (buy) and the ask (sell) price. Spreads can either be tight or wide depending on the market conditions and the time of the trade.
Also read: Best Lowest Spread Forex Broker of 2022
Different forex brokers charge different spreads. This article will explore the best forex spread trading strategies, draw a forex spread comparison from the best forex brokers, and a lot more!
What are spreads in forex?
Spread in forex refers to the difference between the buying price and the selling price. If you look at the price that is quoted for a currency pair, you will see that there is a difference between the buy and sell prices – this is the spread.
Changes in the spread are measured by small price movements known as pips. Pips refer to any change in the fourth decimal place of a currency pair.
Let us take an example to understand spreads better :
This example is based on the currency pair EUR/USD. So, let us assume that the bid is set at 1.3089 and the ask price is set at 1.3091.
Since the spread is the difference between the bid and ask price so the spread, in this case, will be :
Spread = 1.3091-1.3089 = 2 pips
Spreads can either be wide (high) or tight (low). And this is determined by the pips. The more the pips, the wider the spreads and vice versa. Traders favor tighter spreads because it means the trade is more affordable.
Also read: All That You Need To Know About Pip Spread Forex Brokers
The best Forex spread trading strategies
Spread trading techniques and strategies are a great way to keep an eye on the factors that influence spreads and affect the liquidity of the prices. Learn these basic strategies to ensure your FX trade rewards you with good returns:
1. Be aware of the factors that affect the spreads in forex
Several factors affect the liquidity and price movements of the currency pairs. A slight change in any one of these factors can lead to visible changes in their spread. If you are not aware of the factors that affect the spreads, read below:
- Market volatility: due to economic decisions in the country, like changes in the interest rates, new trade rules, or changes in bank rates can cause volatility in the market, hence affecting the spreads in the forex market.
- Geo-political affairs: the news of war, conflicts, unemployment, or any significant change in the policy of countries can see a major fluctuation in the price movements, therefore affecting the spreads.
- Liquidity: if there is low liquidity in the market, then there is a chance that your spreads will be high. Or if you are trading currency pairs that have low liquidity, then also your spreads will widen.
2. Time of trading in the forex market
While the forex market is always open, not every hour needs to be profitable. Time majorly influences forex trade. If you draw a forex spread comparison you will find that in day trading the London, New York, Tokyo, and Sydney markets have low spreads, because of a high trade volume.
Forex traders can take advantage of this strategy and trade during this time to get tight spreads. Moreover, when the London market overlaps with the New York market there are high chances of getting minimal spreads in forex. Between 8 am and 11 pm Eastern time the London and New York session overlap.
The minor and emerging currency pairs can have extremely wide spreads as they do not trade during their main market sessions. Whereas, when you are trading the major currency pairs you should plan to trade them during their main market hours because they are the most liquid then due to high trade volumes.
Also read: What is Forex Market?
3. High liquidity forex pairs
One of the popular forex spread trading strategies is choosing high liquidity forex currency pairs. Traders should begin trading by adopting high liquidity forex pairs. Most of the time all the high liquidity pairs offer lower spreads.
Some of the major currency pairs are, EUR/USD (Euro Dollar), USD/JPY (Dollar Yen), GBP/USD (Pound Dollar), and USD/CHF (Dollar Swiss Franc). Among all the currency pairs these pairs will have the lowest spreads in forex because they are traded in high volumes.
But remember that it is not a fixed rule that these currencies will always have low spreads. When affected by market changes like volatility, liquidity, news, economic factors, or any other natural calamity these spreads can even rise and widen.
Now, the minor pairs or the emerging market currencies like the USD/MXN (US dollar/Mexican Peso), USD/ZAR (US Dollar/South African Rand), or the USD/RUB (US Dollar/Russian Ruble)
Have higher forex spreads in comparison to all major currency pairs. It is because these pairs do not have a high trade volume and are also not traded during their own market time. Therefore, it is advised that traders should trade these pairs with less leverage, or no leverage at all. As even a slight change in price in the opposite direction can incur heavy losses.
Major market currency pairs have tight and narrow spreads which can averagely range from 0.7 pips and 0.6 pips respectively or even less in some cases. Whereas the minors or the emerging market currencies pairs have extremely wide spreads which can range at an average of 90 pips to 1000 pips respectively, or more depending on the forex broker and the market conditions.
4. Forex spread indicator
Traders can even take the help of a forex spread indicator to find what is a good spread in forex market. The indicator is displayed as a curve on a graph to show the direction of the spread as there are changes in the bid and ask prices. It helps to get a visual note of the spreads in forex pairs over time. The indicator tells which pairs are the most liquid and have tighter spreads and which ones have wider spreads.
5. A low forex spread broker
While this is not exactly a strategy, but can be useful to get lower spreads. Apart from the market changes the spreads in forex also, depend on the broker you are trading with. There are several low forex spread brokers you can trade with to get good and low spreads for your ask or bid price. We did a forex spread comparison and have combined a list of the best low forex spread brokers for you.
Also read: Best Zero Spread Forex Brokers 2022
How does spread affect profit in forex?
By now you must have understood that spreads in forex have two ranges: a tight spread and a wide spread. Tight spreads or low spreads occur when there is less volatility and high trade volume of the currency pair, whereas wide spreads are offered when the trade volume of the currency pair is low. So, the range of spreads is bound to affect profit in forex.
The most ideal way for traders to get profits in the forex market is by tighter spreads, which can be acquired by major forex pairs. On the other hand, the exotic currency pairs, have high spreads which make it difficult for traders to make steady profits.
Spread is a major cost involved in trading, which is used as a source of revenue by forex brokers. Some brokers do not charge commissions, so they make their money through spreads. Your profit can be affected by the range of spread, charged by your forex broker. Therefore, the spread affects profit in forex.
Choosing the right spread and how it affects profit in forex
Spreads are of two types which can be charged by your forex broker. A fixed spread or a variable spread. Read below to know more about the two kinds of spreads:
- Fixed spreads :
It is a type of spread in forex which reminds unchanged regardless of the market conditions. It is not affected by the volatility of the market or even the liquidity. Fixed spreads are a good option for regular or short-term traders as they can help them to escape the high and low variation during times of high activity.
- Variable spreads :
These are the absolute opposite of the above-mentioned fixed spreads. These spreads are prone to change according to the changes in market conditions. The spread here is the difference between the buy and sell price of a currency pair that fluctuates in a range. A variable spread is a good option for long-term traders because they can enter and exit the market during times of lesser activity and can get a price that is on the lower end.
What is a good spread in forex?
Every forex broker charges different spreads, depending on the type and lot of trade. But generally as per the forex industry average a spread is considered good and optimal when it is less than 1 pip.
This is considered to be a tight or low spread in forex. A low spread means that you are giving less money to your broker to carry out the trade. Which is a good thing as it means that you are paying closer to the actual market price for a currency pair.
One factor to consider when choosing a broker for spreads is per-lot fees, which are very common in “zero spread” accounts. These types of accounts offer very low spreads but charge additional fixed fees per lot. These fees typically range between $5 and $8 per lot traded, which is the same as the spread value of 0.5 or 0.8 pips.
How to avoid spread of forex?
It is not possible to spreads in forex. To trade in the forex market all traders must give spreads. It is like a service charge that you have to pay your broker. However, you can always go for premium accounts to avoid high spreads in forex. Many brokers offer tight spreads as low as 1 pip to their regular traders or those who have premium accounts.
If you are looking for a low spread broker then you can take a look at the forex spread comparison or forex broker reviews to get the best broker for you.
Having a good knowledge of spreads in forex is key to successful trading, no matter which strategy you pick. Spread can be a little confusing as it can change rapidly, and take a portion of your profits, but you can avoid all this if you know what is a good spread in forex.
We hope that this guide was able to help you with some forex spread trading strategies and on the topic of spread. Trade carefully, follow all the strategies and you will not have to share much of your profit with anyone. If you’re concerned about how spread affects profit in forex, then don’t worry we have even covered that for you!