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

How to Invest in Facebook Stock with Libertex

Facebook is now a popular social media platform all over the world. Aside from that, Facebook, Inc. (NASDAQ: FB) is now one of the biggest companies...

The Dynamics of Commodity Trading: An In-depth Look

From the very clothes on your back to the coffee you sipped this morning, commodities influence our daily lives. This vast market encompasses a wide variety of goods...

STEPN: Libertex explains what you need to know about the "move-to-earn" crypto trend

STEPN (GMT) is a so-called "move-to-earn" crypto token that was launched back in the summer of 2021. However, the price of STEPN has recently picked up...

Crypto Staking Explained And In-Depth Guide

Crypto staking has become more of a buzzword recently in the industry, however, it isn't exactly a new term when it comes to cryptocurrencies. The recent hype surrounding...

Forex trading sessions

Currencies are available to trade 24/5, anywhere globally, while cryptocurrency is available 24/7. However, there is server maintenance when trading cryptocurrencies...

How to Pick the Most Reliable Forex Expert Advisor

It's natural for an ambitious Forex trader to strive to be into action all the time and utilize every opportunity to get profits. Unfortunately, it's physically impossible...

Fundamental Analysis: A Complete Guide

Each trader wants to know which way the price will go. However, to get the closest to an answer to this question, it is necessary not only to watch the chart on the trading platform...

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...

Trading GBP vs Euro Characteristics

After almost two decades of forex history, the GBP vs Euro pair is today one of the important major currency pairs in online trading. Both the Euro...

An Advanced Guide To Day Trading Crypto

With cryptocurrencies all over the news and making headlines in mainstream media for bringing early investors enormous gains, everyone wants a piece of the action...

Unlocking The Power Of Correlation In Forex Trading

Correlation plays a crucial role in forex trading, providing valuable insights into the relationship between currency pairs. By understanding and analyzing correlations...

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...

Does the Stock Market Reflect the Real Economy?

The stock market has often been regarded as an indicator or predictor of the real economy. Its suggested that a large downward movement in the stock market (20% and below) is telling of a future recession...

Copy Trading Strategies: How to Start Successful Copy Trading

To be a successful copy trader, you need to understand quite a bit of nuance and things to ensure that it is the profitable venture you are hoping for...

Ethereum Versus Ethereum Classic: What’s The Difference?

Although Bitcoin was the first-ever cryptocurrency to be created, several cryptocurrencies have since arrived that offer additional features, benefits, and use cases, Ripple and Litecoin...

3 Tips on How to Take Advantage of Volatile Markets

What’s your first reaction when market prices suddenly go tumbling down or climb up? In any case, as a trader, you’ve probably experienced market volatility in a number of situations...

How to Assess PAMM Account

PAMM Account Monitoring Service provides an extensive overview of tools for analyzing the work of managers. In general, all monitoring...

Advantages Of Using AMarkets VPS for FX Trading

VPS is short for a virtual private server and it’s widely used for trading in the financial market. The VPS hosting service will be especially useful for traders who prefer...

Artificial Intelligence and Machine Learning in Trading

Over the past 60 years, AI and machine learning have made a breathtaking jump from science fiction to the real world. Though these technologies are still...

Forex vs. Crypto Trading: Navigating the Complexities and Nuances of Two Diverse Markets

In the high-stakes world of trading, investors are constantly evaluating their options. Forex and cryptocurrency trading are two of the most prevalent choices, each presenting its unique set of opportunities and challenges...

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.