Spread Trading For Beginners – What is a Spread In Forex?
What is a Spread and How Does it Work?
Spread is the difference between a Bid and the Ask prices of each currency from a currency pair. In fact, this is a direct initial loss for the trader, which should be covered in the process of further trading.
Let's give an example on the popular EUR/USD pair with a hypothetical quote of 1.1152/1.1156. From the difference in the currency value, it can be seen that the spread in this case for one lot is 4 pips. To compensate for this loss, you want the currency pair quotes to change in your favor by at least 4 pips. Once this happens, you will start receiving a profit.
After making a transaction, you get a loss which equates to the spread. It happens because you acquired a currency pair at a price slightly higher than the market price (the gap between your price and the market price is already a broker's fee). Therefore, it becomes an inevitable compulsory commission.
How to Calculate Spread
Spread = Ask (the price a buyer is willing to pay) – Bid (the price at which a market maker is willing to buy). Once again, set in pips for convenient calculation.
For example, if the quote of the GBP/USD currency pair is, bid = 1.2920 and ask = 1.2923, then Spread = 1.2923-1.2920 = 0.003 USD or 3 pips.
Why Calculate the Cost of the Spread?
The calculation of the spread cost during the trading process is necessary for building proper trading strategies, primarily automated ones, and for technical analysis of the current situation. The spread cost in the amount of profit becomes more significant when the position stays open for less time and when the frequency of transactions in the trading system gets higher.
Spread cost = Spread size*Lot size*Number of lots
Let’s estimate the spread cost from the example above. The lot size is $100,000.
0.0003*$100,000*5 = $150.
These are the basics of using spreads in trading, which will improve your trading skills. Having this expertise in your arsenal, apply it for your advantage to trade in Libertex. Even the most knowledgeable person won’t be able to trade well without a proper platform.
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Learning new tricks is a step-by-step process, which takes some time and practice. Register a free Demo account to practice your strategy of choice!
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