Have you come across the term “spread” when researching Forex?Don’t worry—it’s not as complicated as it sounds. In fact, understanding spreads can save you money, reduce unnecessary trading costs, and help you become a smarter, more confident trader. Knowing how spreads work is key to maximizing your trading potential.
What Is A Spread, Anyway?
In simple terms, the spread is the difference between the buying price (bid) and the selling price (ask) of a currency pair. Think of it like the markup you pay when you buy something at a store—the shopkeeper charges you slightly more than what they paid for it. In forex trading, the forex spread is how brokers make money. The smaller the spread, the less it costs you to trade.
What Makes a Spread “Good”?
A good spread depends on a few factors, like the currency pair you’re trading, market conditions, and your trading style. For major currency pairs like EUR/USD or USD/JPY, spreads are typically very small, often as low as 1 or 2 pips. These are considered good spreads because they keep your trading costs low.
For exotic or less-traded currency pairs, spreads are usually higher. A good spread here might be 5 to 10 pips, depending on market activity. Always remember: the lower the spread, the better for you as a trader.
Why Does Spread Size Matter?
The size of the forex spread directly affects your profit. If you’re a short-term trader, like a scalper, even small spreads can eat into your gains because you’re making frequent trades. A lower spread allows you to keep more of your profit, improving your overall efficiency and maximizing potential earnings. On the other hand, long-term traders are less impacted by spreads, but it’s still a good idea to aim for competitive pricing.
How To Find Good Spreads
- Stick to Major Pairs: Major currency pairs generally have the tightest spreads because they’re the most traded.
- Trade During Active Hours: Spreads are usually tighter when the market is active, like during the overlap of the London and New York sessions.
- Monitor Market Volatility: During news events or low liquidity periods, spreads can widen, so trade cautiously.
The Bottom Line
A good spread in forex is one that fits your trading style while keeping costs low. Always aim for tighter spreads on major pairs and avoid trading when the market is quiet or overly volatile. Happy trading!
