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FOREX
market pricing
always comes in
pairs between two
different types of
currencies. When
you start trading,
you will have to
buy one currency
and sell another
simultaneously.
If
you want to exit
the trade, you
will have to
buy/sell the
opposite position.
For instance, if
you think the
price of the Euro
is going to rise
against the US
Dollar, for you to
be able to enter a
trade, you will
have to buy Euros
and sell US
Dollars.
If
you then want to exit
the trade, you will
have to sell Euros and
buy back some US
Dollars. You will be
hoping for the best in
your deduction that the
exchange rate for
EU/USD has actually
risen, which means that
you’ll get more Euros
back than when you
bought them. This is
how you make a
profit.
Nowadays,
just about every FOREX
broker thinks they have
the tightest spreads in
the industry. However,
marketing can be quite
deceptive. The subject
of spreads in the FOREX
spot market is very
intricate and quite
often, it is difficult
to grasp. Nonetheless,
nothing has more of an
effect on your trading
profitability.
Firstly,
in order to fully
understand the spread,
you will need to know
what it is. A spread is
the difference between
the price you buy at
(selling price) and the
price you sell at
(bidding price), which
is quoted in the pips.
If the quote between
EUR/USD at a given
moment is 1.2222/4,
then the spread equals
2 pips. If the quote is
1.22225/40, then the
spread will be equal to
1.5 pips.
Brokers
make their money with
spreads. The result of
wider spreads will be a
higher asking price and
a lower bidding price.
The outcome of this is
that you’ll have to pay
more when you buy and
you’ll get less when
you sell, which means
that making a profit
will be more
difficult.
Brokers
usually do not earn the
full spread,
particularly when they
hedge client positions.
The spread lends a hand
to compensate for the
market maker for taking
on risks from the time
it begins a client
trade to when the
broker's net exposure
is hedged (which might
be at a different
price).
Spreads
are vital because they
have an effect on the
return on your trading
strategy in a major
way. Being a trader,
your only interest is
to buy at a low price
and to sell at a high
price (as with futures
and trading
commodities).
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