Spread is a common term you will find in forex trading, and you will encounter this term often during your forex trading activities. What does spread mean in forex trading? Does it affect your trading activities in the forex market? This guide will provide you with useful information about the spread in forex trading and how you can benefit from it.
Spread is the Profit that Forex Brokers will Make for Each Currency Pair Trade
For every buy and sell request you make in the forex trading platform, there is the amount of spread that will get included in the transaction. The term ‘spread’ means the profit that forex brokers will make for each currency pair transaction on their platforms. The forex trading platform will calculate the spread using pips, and each transaction will often use a small amount of pips as the spread. It might look insignificant for you, but when you place a large order in the forex trading platform, the amount of spread you need to pay will also get higher.
The spread you will need to pay to the forex broker will depend on the platform that you are using. Some forex brokers might offer smaller spreads for their traders, while some others might require their traders to pay higher spreads. You need to factor in the amount of spread you are paying in each forex transaction when calculating your profit potential.
Will Spread Affect Your Profit Potential in Forex?
The answer is yes. The spread in your forex transaction will affect your profit potential for the transaction. Why? The reason is that you will pay a certain amount of pips as the spread to the forex broker before you can sell or buy the currency pairs in the forex market. You can consider this as a kind of transaction fee when you compare it to any conventional transaction. However, the spread will vary from time to time, and it will change depending on various factors. Here are some important points about how spread affects your profit potential in forex:
- The more fluctuating the forex market, the more chance the spread will get higher during this period. The common period for forex brokers to widen their spread is when the forex market fluctuates, which means when the price changes for the currency pairs become quite unpredictable. Also, the more fluctuating the forex market, the more spread you need to pay in your trading activities.
- Rush hours can change the value of spreads on various forex trading platforms. Rush hours here mean the period where the forex trading activities overlap between different regions. The overlapping time zones cause the trading activities during the opening hours and closing hours to become somewhat rushed. On the other hand, rush hours are often the best time for forex traders to buy and sell their forex assets, as they can get the biggest profit potential during these hours.
- Different brokers will apply different policies for their spreads. Yes, the spread you pay in one forex broker platform might differ when compared to other platforms, although you are doing the same transaction. The reason is that forex brokers have their own rules regarding the spread they apply on their platform. It’s best for you to factor this in your profit potential calculation for your forex trading activities.
- The size of your transaction can also affect the spread you need to pay. The bigger the transaction you make, the bigger the spread will often be. So, it’s important to keep note that as your profit potential becomes bigger, forex brokers will also charge a bigger spread for your transaction. This will affect the profit potential for your big forex transactions, whether when you are buying new assets or when you are selling your assets.
High Spread and Low Spread
The high spread in forex trading means that the difference between the bid and ask price is high, which often happens when the forex market fluctuates. The high spread will ensure that the forex brokers can secure their profits, because when the forex market fluctuates, the liquidity will become low for them. For forex traders, it’s not preferable to sell their currency pairs when the spread is high, as it can lower their profit potential or increase the amount of losses they need to take.
Meanwhile, the low spread in forex trading means that the difference between the bid and ask price is low, showing that the value of the currency pairs is quite stable and the liquidity is high. For forex traders, it’s best for them to sell their currency pairs during this period, as it can maximize their profit potential or minimize the losses they need to take.
Higher Spreads and Margin Calls
Higher spreads can also cause some issues in your forex trading activities, such as the margin calls. What is a margin call? Margin call means the period when your forex broker needs you to add more funds to your account to continue your transaction further. This often happens when the spreads become high enough for various currency pairs that you trade, so the forex brokers need you to add more funds to your account to provide more assurance for them regarding your account transactions. Margin calls can also happen when you are using too much leverage for your account without putting new funds into your account.
The best way for you to avoid margin calls from the forex broker is to avoid trading when the spread becomes high because of various factors, such as breaking news, unexpected world events, political instability, inflation, and many other factors.
You have learned about spread in forex trading and how it can affect your profit potential. Now, it’s important for you to use this information to your advantage. It’s best for you to trade on the forex trading platform when the spread is low. As the spread can change from time to time, keeping the spread low can help maximize your profit potential. Good luck!