Th e concept of “spread” is essential in financial markets, especially Forex. Without spread, most Forex brokers wouldn’t be able to operate normally.
What is a spread, how do Forex brokers define it, and what spread types are there?
What is spread?
There are two counterparts in financial markets, buyers and sellers.
Buyers want to buy an asset at the lowest price possible. Sellers, on the contrary, want to sell an asset at the highest price. These two sides create a buying price called Bid and a selling price called Ask.
Spread is the difference between Bid and Ask prices.
Spread = Ask – Bid.
How is spread defined?
The Forex market has hundreds of restrictions as it is the place for banks and financial institutions. That is why retail traders like you and me cannot get personal access to Forex trading.
However, there is a way — to use the services of Forex brokers.
Brokerages like FBS have an agreement with a liquidity provider that has access to the real Forex market. This company gives FBS a way to operate in a Forex market, providing broker’s clients with real prices of assets.
A liquidity provider gives FBS a price with a spread included, and FBS gives the price to its customers with this spread plus a little extra to cover the costs of the operation.
Every asset has a Bid and Ask price. When you buy an asset, FBS opens your order at an Ask price, and vice versa; when you sell an asset, FBS opens your order at a Bid price.
Every time you open a Buy trade, you must wait for an asset to go higher if you want to profit. More to say, you need to wait for the Bid price to reach the level where you opened an order (Ask price). That happens because your order is opened at an Ask price, which is usually higher than a Bid price.
Therefore, a spread can also be a fee for opening a trade because you “pay” the spread every time you open a trade.
Smaller spreads mean better conditions for traders. FBS has account types with spread starting from -1 point, which is incredibly convenient for all traders. These market-leading trading conditions help traders to perform better without worrying that the spread will shrink their profits.
What spread types does FBS offer?
As an international Forex broker with over 27 million clients, FBS offers spreads to satisfy every trader.
A fixed spread is not changing and remains on the same level no matter what happens in the market. It is way more convenient for traders, especially in volatile times. So if you want to know your profit in advance, start trading with a Micro account.
A zero spread is a variation of a fixed spread. If you do not want to bother with spread calculations, choose a Zero spread account and pay no spread. However, a commission for the order opening is applied.
For example, if you want to open a XAUUSD trade on a Standard account, your spread will be around 22 points, meaning a 1-lot trade would cost you $22. On a Zero Spread account, you will pay a sum starting from $20 per each lot.
A floating or variable spread is a constantly changing value between Ask and Bid prices. In other words, the spread you pay for purchasing a currency pair fluctuates because of supply, demand, and total trading activity.
FBS offers a floating spread on a Standard account. Let’s say you want to trade EURUSD, the most popular currency pair. On the Standard account, EURUSD has a spread of 3 points and a typical (average) spread of 8 points. A 1-lot trade that has an amount of 100 000 in base currency would cost you only $8 worth of spread. That’s one of the best conditions on the market!
If you want to avoid doing math calculating spreads, try an ECN account with extremely low spreads starting from -1 point. There is a fee for opening a trade, but this account type is one of the most beneficial for traders who open ~1-lot positions because the fee is fixed, and bigger orders mean the exact costs.
What can you do with spreads?
The best thing you can do with your trading is to look for a broker with a low spread, as it is the main gauge of fees you will pay for your trading activity. FBS provides amazing spreads for the most popular trading pairs, making it easy for you to trade without worries.
Sometimes, floating spreads can get very wide due to market fluctuations. Experienced traders can execute a spread trade, opening a Buy and a Sell trade on the same assets with a wide spread, waiting for it to get tighter, and earning on it.