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FOREX Basic Strategy 3

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).
Wider spreads signify buying at higher prices and having to sell lower. A lower spread of half-pip might sound like much, but it can sometimes make the difference between a profitable and a non-profitable trading method.

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