Welcome to another Forex 101, an article mission which has been inculcated to educate the many new investors and new traders out there get familiar with some of the technical terms they may be encountering when they come face to face with the Forex market. Just looking at the market, there about a few hundred technical terms spread around in the forms of market basics and technical analysis date, so coming from the point of view of the new investor, confusions may arise. When you do go online or shop around for brokerages on the internet or even offline, you may see some of their claims of success include shouts of having the tightest and smallest spreads in the entire Forex trading industry.
While this may seem impressive at first glance, it can be quite deceiving. Keep in mind that their main objective is to get you to buy their services, so marketing lingo, which is often described as made of the same material as a hot air balloon, can sometimes use sensational language to make something as ordinary as spread or pips seem like the best thing since sliced bread.
So, let us go into the basics, and explain the concept behind the Forex spread. What it is actually is the difference and the margin between the price that you buy at, often said to be the ask price – and the price that you sell at – which is also known as the bid price. To make this easier to understand, let’s say you are trading with a currency pair of the EUR/USD. And the quote that the market maker is giving to you I is 1.2223/7, then the spread is equals to 4 pips (the difference between the last digits).
So if the value was 1.2228/9, then the spread would be just 1 pip. Pip, for those not in the know, is also known as percentage in points, the common denominator that defines price changes and how most traders make money is by accumulating them in their account. The spread in essence, is the bread and butter of all brokers and financial middlemen out there. The higher the spread, the higher will be the buying price and the lower the sell price – which doesn’t make sense, because you need to be making money on the market, so low spreads are the name of the game.
Spreads are significant because they have an effect on the return on your trading scheme in a large way. As a trader, your solitary concern is trade low and trade lofty (like futures and commodities trading). Wider spreads means trading higher in addition to having to retail lower. A half-pip lower spread doesn’t essentially sound like a good deal, but it can with no trouble indicate the differentiation amid a money-spinning trading tactic and one that isn’t lucrative. So now you know a little more about the Forex spread, and you will not be confused once you come across the term when you start investing.