Forex Spread: What is the Spread and What You Need To Know About It

Your main expense in forex treading is the "spread", and so it will be in your best interest to obtain a firm understanding of what spread is and how it is calculated.

When forex trading is done, one purchases one currency essential with another currency. Each currency has a "bid" price and a "ask" price.

The spread is calculated as the difference between the bid price and the ask price. A portion of the spread is kept by your forex broker, similar to the commission paid to a stock broker.

If you do frequent trades, you can see that the spread will add up quickly and will cut into your profits. So you should always calculate the cost of the spread in any contemplated trading decision you make.

As you might imagine, the broker's fee is built into the spread, and what you might not realize is there are different approaches to computing the spread.

First, your broker might charge a fixed spread.

Second, you may be charged a variable spread.

The third possibility is commission on a basis of percentage of the spread.

There are situations and strategies that may call for one particular approach over another. What works for one situation may not for another. Over time, you will get a feel for which fee structure makes the most sense with your overall investing strategy.

The mechanics of how the spread are computed can make a difference, although in the long run the choice a forex broker is more important to your ongoing profitability. The reason for this is easy to comprehend if you consider that a good broker is going to want to keep you as a client for as long as possible, and therefore should be looking for ways to keep you satisfied.

If you think about it, you will want your broker to be financially stable and have a history of providing good service. So while the amount and computational method of the spread are important, put that into the context of the total service offered by your broker.

Be aware that some unscrupulous brokers will mislead beginning forex traders by telling them there are no fees if you use their service. It should be obvious that this is impossible, but sometimes new traders will fall for it. By acting on greed, they can end up getting charged more than they should.

A good forex broker will be upfront about what the fees are and how they are calculated. A forex trader who wants to be successful long term will want his or her broker to be adequately compensated

The forex spread is one piece of the puzzle you should master if you want to become a successful forex trader.