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

What Forex Pairs to Trade in 2021: Our Top Picks

The year 2020 is gone, but the problems it has brought upon the world and all of the major Forex markets will linger in 2021 as the COVID-10 pandemic is far from...

Libertex: Crypto bears getting ready to hibernate

After a short hiatus, the cryptocurrency market is back in the spotlight once again. Just a matter of weeks ago, there was talk of burst bubbles, lost fortunes and even a long...

What is a Zero-Knowledge Rollup?

Blockchain technology is revolutionizing the way we store, transmit, and validate data. However, as the popularity of blockchain technology grows, so too does the demand for faster...

Ethereum: Will ETH Break Above $2000?

The recent spike in the crypto prices has coincided with the strongest period for the cryptocurrency and blockchain market since the end of 2018. Since December 2020...

What Is Cosmos Crypto?

Scalability and interoperability have been two significant problems for the blockchain world. There are a handful of options for interoperable blockchain networks...

How to earn cryptocurrency without investment

Everyone enters the cryptocurrency space to make money, but not all of them succeed. Many people either give up or lose money because they do not correctly understand how to make money with cryptocurrency.

The Top 10 Forex Brokers With Tightest Spreads

One of the main rules of money management in Forex lies in taking the broadness of the spread into account when executing trades. Low spreads in Forex means...

All you need to know about how to trade cryptocurrency

Cryptocurrencies have received devotion from millions of investors across the globe due to cryptography and transparency of transactions. They have started...

How Is the Bitcoin Price Determined?

To be a profitable trader of Bitcoin (BTC), you need to understand what determines the Bitcoin price. The markets are much like many others, as they need to consider the supply and demand and adoption issues when it comes to BTC...

Bitcoin Investment: A Guide To Trade Bitcoin

As you may already know, cryptocurrency, especially bitcoin, is the most traded financial instruments in recent history. Bitcoin is a popular digital currency among...

All About Cardano: A Crash Course

Cardano has been one of the best attempts to solve two problems that BTC fails to achieve: scalability and network scalability. But are good intentions...

The Art of Trading Forex With Stop Loss (Or Without It)

One can't overstate the importance of mastering the art of stop loss placement when trading Forex or any other financial market for that matter. Stop loss is an...

Top Trading Tools to Help You Make Profits in Forex

The forex business is a lucrative one, with several traders making the kill daily. However, while a lot of successful traders make do with some professional...

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...

Why trade futures?

In this article, we’ll be taking a deep dive into the future. We’ll touch on the types of assets that can be traded using futures, and the advantages and general why trade futures from the global traders...

10 Tips for Choosing a Bitcoin Forex Broker

Virtual currencies, having successfully conquered the field of OTC (over of the Counter) transactions and investments, started to make...

How to Trade Commodities Online with the Best CFDs Broker

Trading commodities online is very popular among traders. With the option to trade commodities on the futures market or through derivatives such as Contracts for Difference (CFDs)...

Trading opportunities during the football world championship

The world football championship is fast approaching. Fans around the world are already thinking about how to best spend their time during this event, and soon...

Maximize Your Profits in 2022 Through the Best Forex Advisors

Practically all modern Forex expert advisors are built on the foundation of the complex programming language called MetaQuotes versions 4 and 5, which are also used...

Crypto CFDs: A Guide to a Safer Cryptocurrency Trading Approach

The unprecedented rise of cryptocurrencies has grabbed the attention of both novice and seasoned investors. While many venture into direct trading of cryptocurrencies...

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.