what does spread mean when discussing forex?
Spread is basically the fee you pay to your broker for using their services/platform to place a trade. Spread is paid on a trade-by-trade basis which means you pay spread on every individual trade you make.
Spread is also charged upfront so the moment you open a trade, the broker deducts the spread immediately so whether you win or lose the trade is none of the brokers business, the broker still gets paid.
Is it possible to avoid paying spread?
Spread in unavoidable as you must pay it, the only difference is some brokers charge lower/tighter spread than others.
Spread Calculation
Let's say you want to trade the EUR/USD currency pair, the broker will always show you two prices: The "Buy" and the "Sell" price.
When you subtract the buy price from the sell price you get the spread for the currency pair. So, spread can also be defined as the difference between the buy/sell price of a currency pair and it is measured in pips.
In the image below, note how the buy price is 1.7323 and sell price is 1.17318. In a case like this the spread will be calculated as (1.17323 - 1.17318) = 0.00005 or 0.5 pips
I just started trading, but I think spread is the difference between the bid price (the price at which the broker is willing to buy a currency pair from you) and the ask price (the price at which the broker is willing to sell the currency pair to you).
Yes, you are right, spread is the bid/ask price difference. In trading everything you do passes through the broker. So, whenever you want to buy a currency pair (or any other instrument) the broker will slightly inflate the buy price to accommodate his fee which is the spread. Different instruments have different spreads some are higher while some are lower.
Those instruments that are traded by more people usually have a lower spread. For example, EUR/USD is the most commonly traded forex pair, so its spread is lower than others. Before you decide to trade any instrument always check the spread to be sure you are not being charged too high.
Welcome to the platform Okoluh. Let me contribute to this spread discussion.
In trading, every time you click on the buy button you are buying at a price that is higher than the market price and this is because the broker has added his fee to the buy price. By the time you sell, you sell at the true market price so the difference between the buy/sell prices is what we call the spread.
Spread can either be variable or fixed spread.
Most brokers charge a variable spread meaning the spread is not a fixed amount, it can change when there is increased fear in the market. Most times when markets are calm you see the variable spread drop but when markets are fearful you see the variable spread increase.
Some other brokers charge fixed spread which remains the same irrespective of whether or not there is fear in the market. So, which one would you go for fixed or variable? Well, they have their advantages and disadvantages. Fixed vs variable spread has already been discussed on this thread https://www.mytradingland.com/thread/fixed-or-variable-spread-which-033c87#2c6e5e
Spread means that the broker will not fill you in at the exact price you clicked on. So, if you clicked on buy at 1.1750, your broker will execute your order at say 1.1751 adding 0.0001 to the actual price, hence charging you a 1 pip spread. The broker does this so they can genrate their own income from your trades.
Spread is your broker increasing the exchange rate of a currency pair you want to trade to accomodate his fees.
Most brokers charge a variable spread meaning it's value can change at any time without your consent. However, there are a few brokers who charge fixed spreads which remain the same all the time.
Spread is simply the difference between the buy price and sell price of a currency pair. Another way to understand it is to see it as the cost of entering a trade.
Quick example
if your broker shows
Buy(ask): 1.2050
Sell(Bid): 1.2048
Spread = 1.2050 - 1.2048= 2pips
Those 2pips are the fee you pay automatically when you open a trade.
Why does spread matter?
When you enter a trade , you start slightly negative because of the spread.
A lower spread= cheaper to trade
A higher spread = Expensive to trade.
Eurusd, GBPusd, usdjpy have low spreads but still depends on the broker.
Spread also determines how close to your entry you can place your stop loss. So, if you are the type of trader that likes setting a tight stop loss, you had better look for a broker that offers very low spread if not every time you set your stop loss it will just get hit even without price reaching it. Many new traders always complain about this phenomenon of stop loss getting triggered without price reaching it, it is due to the wide spread of the broker. When every you are trading always make the bid and ask lines to show on the chart, anytime those lines approach your stop loss line it will be triggered depending on if you are long/short. If you are long and the lower line meets your stop loss it will be triggered, if you are short and the upper line meets your stop loss it will be triggered.