What Does 'Spread' Mean in Forex Trading?

2023-06-05
Summary:

In forex, 'spread' is the gap between buying and selling prices of a currency pair. Learn more about spread and its importance in forex trading.

Forex spread trading refers to a short-term speculative trading method that uses margin amplification to place bets on the unilateral change in spread based on the change in the underlying currency pair, using the construction price as the benchmark. And the forex spread is very important, directly affecting our transaction costs. The smaller the forex spread, the more favorable it is for investors. Let's take a look at the meaning of forex spread.

What does the point difference in foreign exchange trading mean? Introduction to Foreign Exchange Spread

What Does the Point Difference in Forex Trading Mean?

In simple terms, it refers to the transaction fees incurred in forex trading. When conducting trades on a forex platform, there is a cost involved. This cost, known as the spread, is charged by the forex platform to traders.


Buying stocks requires payment of a trading commission, but in forex trading, the commission is generally not charged, but is implicit in the price difference. For example, with a buying and selling quote of 1.2334/1.2335, the spread is one basis point, so market makers (usually forex traders) earn this point, and sometimes it is two or even three points. There are 15 points in the domestic banking system, which is where the profit of each trading platform lies.


The spread is essentially the difference between the buying price and the selling price. Because traders often trade one currency with another, forex trading currencies are often quoted based on the current price compared to another currency. For convenience, these currencies are written in paired form, such as the Australian dollar/US dollar (where the Australian dollar belongs to the "base currency" and the US dollar is referred to as the "relative currency").


The forex spread is easy to judge. When we trade, each currency pair has two prices, namely the buying price and the selling price. The difference between the two prices is the spread. The difference is only charged once at the opening of the market. And the forex handling fee only includes point differences.


Why is the forex spread floating?

Forex floating spread refers to the change in spread that follows market changes. When trading is light, the spread increases, while when trading is active, the spread decreases. This way, calculating the point difference will be more reasonable. The floating spread of forex does not mean that the spread can fluctuate freely. The spread on legitimate forex floating spread websites will fluctuate within a normal range without any outrageous spread.

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